<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
UNDER
THE SECURITIES ACT OF 1933
LARGE SCALE BIOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 2834 77-0154648
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3333 VACA VALLEY PARKWAY, SUITE 1000
VACAVILLE, CA 95688
(707) 446-5501
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT L. ERWIN
CHIEF EXECUTIVE OFFICER
LARGE SCALE BIOLOGY CORPORATION
3333 VACA VALLEY PARKWAY, SUITE 1000
VACAVILLE, CALIFORNIA 95688
(707) 446-5501
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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RONALD B. MOSKOVITZ, ESQ. GERALD S. TANENBAUM,
ELIZABETH H. LEFEVER, ESQ. ESQ.
L. CHRISTOPHER VEJNOSKA, ESQ. CAHILL GORDON & REINDEL
JULIE M. MCEVILLY, ESQ. 80 PINE STREET
BROBECK, PHLEGER & HARRISON LLP NEW YORK, NEW YORK
ONE MARKET 10005
SPEAR TOWER (212) 701-3000
SAN FRANCISCO, CALIFORNIA 94105
(415) 442-0900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, no par value per share.................... $100,000,000 $26,400
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Dated April 6, 2000
PROSPECTUS
[LOGO]
Shares
LARGE SCALE BIOLOGY CORPORATION
Common Stock
Large Scale Biology Corporation is selling all of the shares of common stock in
this offering. This is our initial public offering. We estimate that the initial
offering price will be between $ and $ per share.
We intend to apply to list our common stock on the Nasdaq National Market under
the symbol "LSBC."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE READ "RISK FACTORS"
BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO LARGE
PRICE TO UNDERWRITING SCALE BIOLOGY
PUBLIC DISCOUNTS CORPORATION
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<S> <C> <C> <C>
Per Share $ $ $
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Total $ $ $
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We have granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments.
J.P. MORGAN & CO.
CHASE H&Q
WILLIAM BLAIR & COMPANY
, 2000
<PAGE> 3
[The inside front cover contains the Large Scale Biology logo and a diagram
depicting Large Scale Biology's two major technologies and the resulting
expected commercial applications. It also contains a graphic relating the use of
these technologies to the creation of therapeutics.]
<PAGE> 4
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of its delivery or of any
sale of our common stock.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................... 1
Risk Factors................................ 6
Cautionary Note on Forward-Looking
Statements................................ 16
Use of Proceeds............................. 17
Dividend Policy............................. 17
Capitalization.............................. 18
Dilution.................................... 19
Selected Financial Data..................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 21
Business.................................... 26
Management.................................. 34
</TABLE>
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Transactions and Relationships with Related
Parties................................... 44
Principal Stockholders...................... 46
Description of Capital Stock................ 49
Shares Available for Future Sale............ 52
United States Tax Consequences to Non-United
States Holders of Common Stock............ 54
Underwriting................................ 56
Legal Matters............................... 58
Change in Independent Auditors.............. 58
Experts..................................... 58
Additional Information...................... 59
Index to Financial Statements............... F-1
</TABLE>
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Until , 2000, all dealers that effect transactions in the
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligations to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
------------------------
We own or have the right to various trademarks, service marks and trade names
used in our business. These include LARGE SCALE BIOLOGY(TM), LARGE SCALE
PROTEOMICS(TM), GENEWARE(R), HUMAN PROTEIN INDEX(TM), HPI(TM), KEPLER(R),
MOLECULAR ANATOMY AND PATHOLOGY(TM), MAP(TM), MOLECULAR EFFECTS OF DRUGS(TM),
MED(TM), PHARMACEUTICAL PROTEOMICS(TM) and ProGEx(TM). This prospectus also
includes trademarks, service marks and trade names owned by other companies.
<PAGE> 5
PROSPECTUS SUMMARY
In this prospectus, "Large Scale Biology," "we," "us" and "our" refer to Large
Scale Biology Corporation, a Delaware corporation, its subsidiaries and its
California predecessor, and not to the underwriters. This summary highlights
information contained elsewhere in this prospectus. This summary does not
contain all of the information you should consider before buying shares of our
common stock. You should read the entire prospectus carefully.
LARGE SCALE BIOLOGY CORPORATION
Large Scale Biology applies its proprietary proteomics and functional genomics
technologies to develop products and establish commercial collaborations with
pharmaceutical, biotechnology, chemical and other life sciences companies. Our
key proprietary technologies, ProGEx and GENEWARE, supported by our patent
portfolio, provide us with a broad range of commercial opportunities. We believe
that we can apply our proprietary technologies to enable the transformation of
proteomic and genomic information into multiple product opportunities such as
drug targets, therapeutics, diagnostics and the evaluation of drug effectiveness
and toxicity.
Proteomics is the study of proteins. All biological processes, including
diseases and responses to therapeutics, involve changes in proteins. Despite the
near complete sequencing of the human genome, the function of proteins and genes
is not fully understood. Our automated, high-throughput ProGEx system provides a
snapshot of the protein composition, or proteome, of cells and tissues. We use
our ProGEx system to rapidly identify changes in proteins that are associated
with diseases or with a therapeutic's effects. We believe that proteomics will
become crucial in discovering and developing therapeutics, and in predicting,
diagnosing and monitoring diseases. Our ProGEx system provides information that
is unavailable using genomics technologies alone.
Functional genomics is the study of what genes do. Genes determine where, when,
how and which proteins are made in a living organism. GENEWARE is our
proprietary, automated technology for rapidly inserting genes into host
organisms for novel gene discovery and gene function analysis. We also intend to
apply this technology to efficiently produce human therapeutic and other
commercially useful proteins.
We are using our proprietary technologies to continue to build our key resources
for use in product discovery, development and production by us and our
collaborators. We intend to integrate our information on gene function with our
proteomic databases by correlating the function of genes with proteomic
information from normal and diseased cells and tissues to identify drug targets
and therapeutic proteins.
We are using our ProGEx system to develop our:
- HUMAN PROTEIN INDEX, or HPI, database -- our database of the detailed
protein composition of all normal human tissues and cells
- MOLECULAR ANATOMY AND PATHOLOGY, or MAP, database -- our database that
describes the changes in protein composition associated with disease
- MOLECULAR EFFECTS OF DRUGS, or MED, database -- our database that
describes changes in protein composition associated with the
administration of therapeutics and other treatments
- Portfolio of marker proteins -- proteins significantly correlated with
disease or a therapeutic's effects, for use as drug targets, therapeutic
proteins or diagnostics
We are using our GENEWARE technology to:
- Identify novel genes
- Determine gene functions
- Manufacture therapeutic proteins, vaccines and other commercially useful
proteins
We believe that by building our portfolio of strategic collaborations, we will
generate revenue and establish a long-term economic interest in product
pipelines of selected collaborators. Since our inception, we have established
collaborations with pharmaceutical, biotechnology, chemical and other life
sciences companies as well as research institutions and government
1
<PAGE> 6
agencies. We generated $16.1 million of revenues in 1999 from these
arrangements. We currently have seven ongoing research and technology
development programs and collaborations.
We structure our current collaborations in a variety of ways. We obtain
immediate funding in the form of ongoing committed research and development
payments and, in some cases, technology access fees from our collaborators. In
some instances, we also share in the long-term value of the products that we
assist our collaborators in developing through the retention of some product
rights and from royalty fees from the sale of products developed using our
technologies.
In September 1998, we entered into a three-year contract with The Dow Chemical
Company and its subsidiary Dow AgroSciences LLC, collectively referred to as
Dow, for their exclusive use of our GENEWARE technology for development of
functional genomics in selected agricultural and industrial chemical categories.
During this collaboration, we and Dow have identified commercially significant
genes for specific agricultural and industrial uses that will be marketed by Dow
and its affiliates. We retain the right to use any of the identified genes
resulting from this collaboration for uses in other categories not allocated to
Dow. Dow can elect to continue this collaboration beyond September 2001 by
paying additional technology access fees. If Dow does not elect to continue this
collaboration, we will be able to market to others access to our technology for
agricultural and industrial chemical purposes. Our revenues from Dow in 1999
were $14.2 million.
We file patent applications and trademarks to protect our intellectual property.
As of March 15, 2000, our proprietary technologies are protected by 19 issued
and 47 pending U.S. patents and 12 issued and 44 pending foreign patents
relating to proteomics, genomics and bioprocessing. Because we discover
proprietary proteins and determine the function of genes, we believe that
patents limited to the DNA sequence of genes are not important to the success of
our company.
STRATEGY
Our principal objective is to commercialize products and technologies as we
establish a leadership position in proteomics and functional genomics. We use
our proprietary technologies to identify, quantify and determine the function of
proteins in cells and tissues. In addition, our technology can be used to
determine gene functions as well as to cost-effectively produce proteins.
The key elements of our strategy include the following:
- Becoming the definitive source of information about human proteins
through our HPI database
- Identifying potential drug targets, therapeutic proteins and diagnostics
with our proteomics and functional genomics technologies
- Becoming the leading provider of protein information for protein biochips
and other diagnostic tools
- Clinically testing our first therapeutic product, our patient-specific
vaccine for the treatment of non-Hodgkins lymphoma
- Commercializing our protein production technology through the manufacture
of our own therapeutic proteins and proteins for our clients
CORPORATE INFORMATION
Large Scale Biology Corporation was incorporated in California in June 1987 as
Biosource Genetics Corporation. We will reincorporate in Delaware prior to the
completion of this offering. Our principal executive offices are located at 3333
Vaca Valley Parkway, Suite 1000, Vacaville, California 95688 and our telephone
number is (707) 446-5501. Our website can be found at www.lsbc.com. Information
contained in our website is not a prospectus and does not constitute a part of
this prospectus.
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THE OFFERING
The number of shares of our common stock outstanding after this offering is
based on the number of shares outstanding as of March 15, 2000, and includes the
conversion of all outstanding shares of preferred stock into common stock upon
the completion of this offering, and excludes:
- 2,774,255 shares of common stock issuable upon exercise of stock options
outstanding at March 15, 2000 at a weighted average exercise price of
$8.10 per share
- 552,325 shares of common stock reserved for issuance under our stock
option plans at March 15, 2000 and
- 1,408,258 shares of common stock issuable upon the exercise of warrants
outstanding at March 15, 2000 at a weighted average exercise price of
$12.33 per share
Except as set forth in the financial statements or as otherwise specified in
this prospectus, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option
- assumes an initial public offering price of $ per share, the midpoint
of the range shown on the cover of this prospectus
- reflects the conversion of all of our outstanding convertible preferred
stock into our common stock upon the completion of the offering
- reflects our reincorporation in Delaware prior to the completion of this
offering and
- assumes the filing of the Company's amended and restated charter prior to
the completion of this offering
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COMMON STOCK OFFERED............................... shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS shares
OFFERING.........................................
USE OF PROCEEDS.................................... For research and development activities, product
development initiatives, capital expenditures and
working capital and other general corporate
purposes.
PROPOSED NASDAQ NATIONAL MARKET SYMBOL............. "LSBC"
</TABLE>
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SUMMARY FINANCIAL DATA
The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and the related
notes thereto included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1999 are derived from our
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statement of operations data for the year ended December 31,
1999 and the consolidated balance sheet data as of December 31, 1999 give effect
to our acquisition of Large Scale Proteomics on February 1, 1999. The pro forma
statement of operations data gives effect to our acquisition of Large Scale
Proteomics as if it occurred on January 1, 1999. Non-recurring charges of $19.8
million representing research and development are excluded from such data.
The unaudited pro forma net loss per share is calculated on a pro forma basis
after giving effect to the conversion of all shares of our convertible preferred
stock into 5,627,645 shares of our common stock upon completion of this
offering. The unaudited pro forma net loss per share does not give effect to the
non-cash compensation expense associated with employee stock options that will
become exercisable upon completion of this offering. The non-cash compensation
expense related to these options, assuming no forfeitures, will be approximately
$ million. These charges are based upon the initial offering price of
$ per share.
The unaudited pro forma as adjusted balance sheet data gives effect to the
conversion of our convertible preferred stock and of our receipt of the
estimated net proceeds from the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discounts and offering expenses payable by
us. The unaudited pro forma as adjusted balance sheet data also includes the
non-cash compensation expense of $ associated with employee stock
options that will become exercisable upon completion of this offering.
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YEAR ENDED DECEMBER 31,
---------------------------------------------------
PRO FORMA
1997 1998 1999 1999
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(UNAUDITED)
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In thousands, except share and per share data
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Revenues.................................................. $ 2,108 $ 3,394 $ 16,090 $ 16,141
Costs and expenses:
Development agreements.................................. 1,735 2,565 7,988 8,116
Research and development................................ 5,872 6,973 9,163 9,183
General, administrative and marketing................... 3,363 3,492 8,333 8,213
Purchased research and development...................... -- -- 19,783 --
---------- ---------- ----------- -----------
Total costs and expenses........................ 10,970 13,030 45,267 25,512
---------- ---------- ----------- -----------
Loss from operations...................................... (8,862) (9,636) (29,177) (9,371)
Total other income........................................ 2,293 215 1,450 1,450
---------- ---------- ----------- -----------
Net loss before provision for income taxes................ (6,569) (9,421) (27,727) (7,921)
Provision for income tax.................................. -- -- 190 190
---------- ---------- ----------- -----------
Net loss.................................................. (6,569) (9,421) (27,917) (8,111)
Warrant accretion......................................... -- (1,224) (5,353) (5,353)
---------- ---------- ----------- -----------
Loss applicable to common stockholders.................... $ (6,569) $ (10,645) $ (33,270) $ (13,464)
========== ========== =========== ===========
Net loss per share -- basic and diluted................... $ (1.06) $ (1.70) $ (5.38) $ (2.18)
========== ========== =========== ===========
Weighted average shares outstanding -- basic and
diluted................................................. 6,221,490 6,244,516 6,183,485 6,183,485
========== ========== =========== ===========
Unaudited pro forma net loss per share -- basic and
diluted................................................. $ (2.88) $ (1.17)
=========== ===========
Pro forma weighted average shares outstanding -- basic and
diluted................................................. 11,553,650 11,553,650
=========== ===========
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SUMMARY FINANCIAL DATA (CONTINUED)
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AS OF DECEMBER 31, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
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(UNAUDITED)
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In thousands
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents................................... $ 6,975 $
Marketable securities....................................... 7,124
Working capital (deficit)................................... (1,514)
Total assets................................................ 31,603
Long-term debt, net of current portion...................... 2,457 2,457
Convertible preferred stock................................. 38,713
Accumulated deficit......................................... (78,997)
Total stockholders' equity.................................. 4,518
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RISK FACTORS
Investing in our common stock involves a high degree of risk. Prospective
investors should carefully consider, along with other factors, the following
risks, which make investment in our common stock largely speculative. If any of
the following risks actually occurs, we may not be able to conduct our business
as currently planned and our financial condition, results of operations and
stock trading prices could be adversely affected. Please read the "Cautionary
Note on Forward-Looking Statements" which follows this section.
RISKS RELATED TO OUR BUSINESS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT, AND WE MAY NOT BE ABLE TO SUCCESSFULLY
DEVELOP AND COMMERCIALIZE OUR PRODUCTS AND TECHNOLOGIES
We are in an early stage of development as an operating company, and we are
subject to all the risks inherent in the development of a business enterprise,
including the need for substantial capital to support the development of our
products and technologies. We have had limited revenue from contract research
and development services and collaborations. The three primary database programs
that we intend to commercialize, our HPI, MAP and MED databases, are still in
development. We have marketed a limited number of our own technologies. We have
not yet operated our ProGEx proteomics system on the large scale we believe will
be necessary to complete our Human Protein Index and other proteomics projects.
In addition, we are still in the process of integrating our proprietary protein
database with information on gene function. There can be no assurance that we
will be able to manufacture, assemble, maintain and operate our ProGEx system to
achieve our proteomics objectives.
Our other anticipated products, including a novel vaccine for the treatment of
non-Hodgkins lymphoma, most likely will require that we enter into new
collaborations before we can manufacture and market them, and are subject to the
governmental regulatory process. There can be no assurance that our therapeutic
vaccines, drugs or proteins under development, or our future vaccines and drugs,
will be effective in humans, will meet regulatory requirements for safety and
efficacy or will have a commercial market. There also is no assurance that we
will be able to successfully develop or commercialize any of our products or
technologies.
WE ARE IN NEW AND DEVELOPING FIELDS AND THERE MAY NOT BE A MARKET FOR OUR
PRODUCTS AND TECHNOLOGIES
Our technologies are focused in the new and developing fields of proteomics and
functional genomics. Our research is fundamentally novel and we cannot assure
the acceptance of its scientific merit, the benefits of products produced by it
or that public reaction to it will be favorable. There is limited commercial
precedent for protein-based gene expression products and technologies, including
our plant-derived proteins and our ProGEx system and GENEWARE technology. The
usefulness of the information and products generated by our proteomics and
functional genomics technologies is unproven, and our collaborators and
potential collaborators may determine that they are not useful or
cost-effective. In addition, we must develop these new products and technologies
in time to meet market demand, if any. If we fail to do so, it is likely that
other technologies and companies will predominate and we will not be able to
earn a sufficient return on our investment.
WE HAVE A HISTORY OF LOSSES AND CANNOT PREDICT WHEN WE WILL BECOME PROFITABLE,
IF AT ALL
We have had net losses in each year since our inception in 1987. We sustained a
net loss of approximately $27.9 million in 1999 and had an accumulated deficit
of approximately $79.0 million as of December 31, 1999. Net cash flow provided
by operating activities was positive in 1999 due principally to payments under
the Dow agreement, but we incurred substantial non-cash charges of $24.8 million
in 1999 due principally to a non-recurring expense associated with the
acquisition of Large Scale Proteomics. Milestone payments from the Dow agreement
are expected to be substantially lower in 2000, and it will be necessary to
enter into new collaborations, with parties not yet identified, to make up for
this decline in revenue. Additionally, we expect to spend significant amounts to
fund research and development and to enhance our core technologies. As a result,
we expect that our operating expenses will increase significantly and we will
need to generate significant additional revenues from collaborations and the
commercialization of our products and technologies to achieve profitability. We
expect to incur substantial losses for the foreseeable future. We cannot predict
when we will become profitable, if at all.
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WE WILL REQUIRE ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO RAISE
In order for us to remain competitive, we must continue to develop our databases
and improve our technologies, including our ProGEx and GENEWARE systems, improve
our bioinformatics software and develop or acquire new technologies. We believe
that the proceeds from this offering, together with revenues from our
collaborations, research and development grants and all other sources will be
sufficient to fund our operations for at least the next 12 months. However,
changes in our business may occur that would consume available capital resources
significantly sooner than we expect. If our capital resources are insufficient
to meet future capital requirements and expenses, we will have to raise
additional funds, which may adversely affect our stock price. If we are unable
to raise sufficient additional capital, we will have to curtail or cease
operations.
OUR TECHNOLOGIES MAY BE SUPERSEDED OR MADE NON-COMPETITIVE BY ALTERNATIVE
METHODS
The genomics and proteomics businesses are intensely competitive. The genomics
and proteomics industries are characterized by extensive research efforts,
resulting in rapid technological progress. There can be no assurance that our
competitors will not succeed in developing products or technologies that are
more effective than ours or that would render our products or technologies
obsolete or noncompetitive.
Many universities, public agencies and established pharmaceutical,
biotechnology, chemical and other life sciences companies with substantially
greater resources than we have are developing and using technologies and are
actively engaging in the development of products similar to or competitive with
our products and technologies. Some of our competitors are using proteomics and
genomics technologies to identify potential drug targets, therapeutic proteins
and diagnostic marker proteins. In addition, some of our competitors have
developed databases containing gene sequence, gene expression, genetic variation
or other genomic information and are marketing or plan to market their data to
pharmaceutical, biotechnology, chemical and other life sciences companies. To
remain competitive, we must continue to invest in new and existing technologies,
expand our databases and improve our bioinformatics software, including
proprietary software used with our ProGEx system.
Alternative methods may be devised by our competitors to obtain proteomic and
functional genomic information more rapidly, more completely or with greater
accuracy than is achieved by using our ProGEx and GENEWARE systems. There has
been and continues to be substantial academic and commercial research effort
devoted to development of such alternative methods. If a successful replacement
method is developed, the commercial basis for the products and technologies we
intend to provide could be undermined.
WE WILL RELY HEAVILY ON OUR COLLABORATORS TO FULLY DEVELOP AND COMMERCIALIZE OUR
PRODUCTS AND TECHNOLOGIES
Although we intend to independently pursue some novel therapeutic product
applications into the development stage, the full development and
commercialization of most of our products are expected to be undertaken only in
collaboration with pharmaceutical, biotechnology, chemical and other life
sciences companies. Our success will depend in large part on our ability to
enter into collaborations with other companies for the research and development,
pre-clinical and clinical testing and the regulatory approval and
commercialization of our products. Our reliance upon these companies for these
capabilities will reduce our control over such activities and could make us
dependent upon them.
To date, we have entered into only a limited number of collaborations. The scope
of these collaborations has generally been limited to demonstrating the function
of plant genes, the feasibility of the viral-based gene expression of certain
targeted proteins in plants and the identification of marker proteins for drug
development. Some of our agreements provide us with rights to participate in the
commercial development of products resulting from the use of our technologies.
We cannot assure you that we will be able to obtain such rights in future
collaborations. In addition, unforeseen delays or complications could arise and
result in the breach of our contractual obligations with our collaborators and
others, or render our technologies unable to perform at the quality and capacity
levels required for success.
THE NON-RENEWAL OR PREMATURE TERMINATION OF THE DOW AGREEMENT OR OUR OTHER
COLLABORATIONS COULD ADVERSELY AFFECT OUR REVENUES AND HARM OUR BUSINESS
In 1999, the Dow agreement accounted for greater than 88% of our revenues. The
Dow agreement terminates on September 1, 2001. A premature termination of the
Dow agreement could have an adverse effect on our revenues and harm our
business. If
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in the future our collaborations are similarly limited to a small number of
major relationships, our revenues would be adversely affected and our business
could be harmed by the premature termination of those relationships.
CONFLICTS WITH OUR COLLABORATORS COULD HARM OUR BUSINESS
Conflicts with our collaborators could have a negative impact on our
relationships with them and impair our ability to enter into future
collaborations, either of which could adversely affect our business. Our
collaborators could develop competing products, preclude us from entering into
collaborations with their competitors or terminate their agreements with us
prematurely. Moreover, disagreements could arise with our collaborators over
rights to our intellectual property and our rights to share in any of the future
revenues from products or technologies resulting from use of our technologies,
or our activities in separate fields may conflict with other business plans of
our collaborators.
Dow owns or controls patent rights in the field of viral vectors covering the
infection of plants and the expression of foreign genes in plants, and has
informed us that it believes that some of our plant viral activities may fall
within the scope of these patents. If we are unable to resolve this matter, and
are found to have infringed upon these rights, our business could be adversely
affected. These kinds of disagreements could result in costly and time-consuming
litigation and divert our financial and managerial resources.
THE TIME REQUIRED TO ESTABLISH A COLLABORATION IS LENGTHY AND UNPREDICTABLE, AND
THE PROCESS CAN BE EXPENSIVE
Our ability to obtain collaborators for our products and technologies depends in
significant part upon their perception that our products and technologies can
help accelerate efforts in drug development and genomic and proteomic research.
Presentations often need to be made to various departments within a single
collaborator's organization, including research and development personnel and
key management. In addition, we may be required to negotiate agreements
containing terms unique to each collaborator. The time required to complete this
process is unpredictable and we may expend substantial funds and management
effort with no assurance that we will successfully enter into agreements with
collaborators or generate revenues from the agreements, if at all.
WE MUST ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PROVIDE SALES AND MARKETING
SERVICES, OR DEVELOP THESE CAPABILITIES ON OUR OWN, IF WE ARE TO SUCCESSFULLY
COMMERCIALIZE OUR PRODUCTS AND TECHNOLOGIES
We have no sales or marketing force. Although we plan to enter into sales and
marketing arrangements with third parties, we can offer no assurances that we
will be able to enter into these arrangements on favorable terms, if at all. If
we cannot enter into these arrangements, we must develop a sales and marketing
force with sufficient technical expertise to generate demand for our products
and technologies. There can be no assurance that we will be able to establish
effective sales and distribution capabilities.
IF OUR STRATEGIC DECISIONS DO NOT YIELD COMMERCIALLY VIABLE PRODUCTS, WE MAY NOT
ACHIEVE PROFITABILITY
While our technologies may be applicable to multiple products in numerous
industries, due to our limited financial and managerial resources we have made
strategic decisions to pursue specific products in specific industries. This
requires us to forego opportunities on other products and industries. We cannot
assure you that we will successfully select technologies or those genes or
proteins with the most potential for commercial development, or that any product
based on our technologies or on genes or proteins that we discover can be
successfully commercialized. Our efforts may not produce viable commercial
products and we may lose other, more profitable opportunities.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANUFACTURE OUR PRODUCTS
We have not yet commercially manufactured any products using our technologies,
including proteins manufactured with our GENEWARE technology. We have only
produced products on a pilot scale. There can be no assurance that products
utilizing our technologies can be economically manufactured or that our
facilities will be capable of producing commercial quantities in compliance with
applicable regulatory requirements and at acceptable costs.
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DELAYS IN ACQUISITION OF SUFFICIENT HUMAN AND OTHER SAMPLES AND DIFFICULTY IN
INTEGRATING PROTEIN DATA WITH GENOMIC INFORMATION MAY ADVERSELY AFFECT THE
DEVELOPMENT OF OUR DATABASES AND OTHER PRODUCTS
We rely upon outside sources for human and other cell and tissue samples from
which we generate proteomics information. We may experience delays in completing
our databases due to difficulties in acquiring high quality cell and tissue
samples. These delays could occur as a result of legal difficulties in obtaining
rights to use cell and tissue samples for commercial purposes or as a result of
limited availability of high quality samples in an adequate state of
preservation. Our business could be adversely affected if we experience
difficulties or delays in acquiring cell and tissue samples, if we lose access
to some of our sources or if they charge us higher access fees or impose tighter
restrictions on our use of the information generated from the samples.
We may not be able to successfully integrate our proprietary protein data with
genomic information. We cannot assure you that our competitors will not find
more efficient ways to integrate this information into a commercialized source
of information about proteins. If we do not successfully create and
commercialize a combined proteome/genome source of information, our business
could be adversely affected.
WE ARE HIGHLY DEPENDENT ON OUR SENIOR MANAGEMENT AND OTHER KEY SCIENTIFIC
EMPLOYEES
The loss of one or more of our senior personnel could have a material adverse
effect on our business and could inhibit our research and development and
commercialization efforts. In addition, there can be no assurance that we will
be able to successfully manage our growth or to meet the staffing requirements
of additional collaborative relationships. We face competition for research
scientists and technical staff from other companies, academic institutions,
government entities, nonprofit laboratories and other organizations.
ANY ACQUISITIONS THAT WE MAKE COULD ADVERSELY AFFECT OUR BUSINESS
We have acquired and may acquire other assets, technologies and businesses. If
any of the following or other events occur, our business could be adversely
affected:
- We may be exposed to unknown liabilities of acquired businesses
- Our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to decline
- We may experience difficulty and expense in assimilating the operations,
technology and personnel of the acquired businesses, which may disrupt
our business and divert our management's time and attention
- We may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies
- Our relationships with key customers of acquired businesses may be
impaired, due to the change in management and ownership of the acquired
businesses
- We may be unable to retain key employees of the acquired businesses
- We may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets
- We may incur in-process research and development charges
- Our stockholders may be diluted if we pay for the acquisition with equity
securities
CATASTROPHIC DAMAGE TO ANY OF OUR FACILITIES COULD IMPAIR OUR BUSINESS
Some of our biological material and proprietary instrumentation and databases is
currently located at one of three facilities. If a facility suffered
catastrophic damage from a disaster, such as a fire, flood, earthquake, power
loss or similar event, we might lose important, or even unique, materials,
machinery, equipment and databases. Loss of such material, machinery, equipment
and databases could delay or impair our operations and our research. The
insurance we maintain may not be adequate to cover our losses resulting from
disasters or other business interruptions. In addition, the potentially unique
nature of our materials, instrumentation, databases and research activities
could make it difficult for us to recover quickly from a disaster, if at all.
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WE RELY ON A LIMITED NUMBER OF THIRD-PARTY SUPPLIERS TO OBTAIN NECESSARY
EQUIPMENT, SUPPLIES AND DATA
Operation of our ProGEx system and GENEWARE technologies involve the use of
certain proprietary products and specialized equipment made by other companies,
such as mass spectrometers, specialized chemicals, enzymes and protein dyes. We
rely on a limited number of suppliers for these products, which may not be
available in sufficient quantities or at acceptable costs in the future. Changes
in the method of manufacture of these products in the future also may render
them unsuitable for use in our processes. In addition, if a third party claims
that our use of these products infringes their patent rights, our use of them
could become more costly or could be prevented altogether. We may be unable to
obtain additional necessary equipment, supplies and data from alternative
suppliers on commercially reasonable terms.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS UPON THE SUCCESS OF THE COMPANIES IN THE PHARMACEUTICAL,
BIOTECHNOLOGY, CHEMICAL AND LIFE SCIENCES INDUSTRIES AND THEIR DEMAND FOR OUR
PRODUCTS AND TECHNOLOGIES
We expect that our revenues in the foreseeable future will be derived primarily
from products and technologies provided to the pharmaceutical, biotechnology,
chemical and life sciences industries. Accordingly, our success will depend
directly upon the success of the companies in these industries and their demand
for our products and technologies. Our operating results may fluctuate
substantially due to reductions and delays in research and development
expenditures by companies in those industries, or their unwillingness or
inability to use our products and technologies. These reductions and delays may
result from factors which are not within our control, such as:
- Changes in economic conditions generally
- The extent to which companies in these industries conduct research and
development involving proteomics and functional genomics in-house or
through industry consortia
- The extent to which genomic information is not made public or is covered
by third party patents
- Consolidation within one or more of these industries
- Changes in the regulatory environment affecting these industries
- Pricing pressures
- Market-driven pressures on companies to consolidate and reduce costs
- Other factors affecting research and development spending in these
industries
THE MARKETS FOR THERAPEUTICS AND VACCINES ARE HIGHLY COMPETITIVE
The markets for protein development and production, including human and
veterinary therapeutics and vaccines like the ones we are developing, are highly
competitive. Competitors with substantially greater resources than we are
actively developing products similar to or competitive with our products and
potential products. Our competitors may succeed in developing products or
obtaining regulatory approval earlier than we do or in developing products that
are more effective than those we develop or propose to develop. Several
pharmaceutical, biotechnology, chemical and other life sciences companies are
engaged in research and development with respect to the use of novel gene
expression systems to produce therapeutic proteins. New developments are
expected to continue, and discoveries by others may render our products and
technologies non-competitive.
THE U.S. GOVERNMENT MAY EXERCISE ITS RIGHTS TO LICENSE THE INVENTIONS DEVELOPED
BY US WITH FEDERAL FUNDS
Our grants under U.S. government research and technology development programs
provide the U.S. government a non-exclusive, non-transferable, paid-up license
to use inventions developed by us using federal funds. If the government
exercises these rights, our potential market could be reduced and our revenue
could be adversely affected.
WE MAY NOT HAVE ACCESS TO SUFFICIENTLY COMPLETE, ACCURATE OR UNCONTAMINATED DATA
FROM OUTSIDE SOURCES, INCLUDING GENOME SEQUENCE DATA
There can be no assurance that public domain genome sequence data will be
sufficiently complete to enable us to fully integrate that data with our
proprietary protein information. In addition, we rely on scientific and other
data supplied by others,
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including our academic collaborators and our sources of cell and tissue samples.
This data could contain errors or other defects which could corrupt our
databases. We also cannot guarantee that our data sources acquired this
information in compliance with legal requirements.
WE AND OUR COLLABORATORS ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT
REGULATORY REQUIREMENTS, WHICH COULD INCREASE OUR OPERATING COSTS OR ADVERSELY
AFFECT OUR ABILITY TO OBTAIN GOVERNMENT APPROVAL OF OUR PRODUCTS
Regulatory requirements ultimately imposed on our products could limit our
ability to test, manufacture and commercialize our products. Further, once
regulatory approval is obtained, a marketed product and its manufacturer are
subject to continual review, and discovery of previously unknown problems with a
product or manufacturer may result in restrictions on the product, manufacturer
and manufacturing facility, including withdrawal of the product from the market.
In certain countries, regulatory agencies also set or approve prices. There can
be no assurance that we will receive the clearances and approvals necessary for
the clinical testing, field-testing, manufacturing or marketing of our products.
WE AND OUR COLLABORATORS MAY NOT BE ABLE TO OBTAIN FDA AND OTHER APPROVALS FOR
OUR PRODUCTS IN A TIMELY MANNER, OR AT ALL
Drugs and diagnostic products are subject to an extensive and uncertain
regulatory approval process by the FDA and comparable agencies in other
countries. The regulation of new products is extensive, and the required process
of laboratory testing and human studies is lengthy and expensive. The burden of
these regulations will fall on us to the extent we are developing proprietary
products on our own. If the products are the result of a collaboration effort,
these burdens may fall on our collaborators or may be shared with us. We may not
be able to obtain FDA approvals for those products in a timely manner, or at
all. We may encounter significant delays or excessive costs in our efforts to
secure necessary approvals or licenses. Even if we obtain FDA regulatory
approvals, the FDA extensively regulates manufacturing, labeling, marketing,
promotion and advertising after product approval. Moreover, several of our
product development areas may involve relatively new technology and have not
been the subject of extensive product testing in humans. The regulatory
requirements governing these products and related clinical procedures remain
uncertain and the products themselves may be subject to substantial review by
foreign governmental regulatory authorities that could prevent or delay approval
in those countries. Regulatory requirements ultimately imposed on our products
could limit our ability to test, manufacture and, ultimately, commercialize our
products.
NEW RULES ISSUED BY THE USDA MAY ADVERSELY AFFECT OUR COLLABORATORS' ABILITY TO
COMMERCIALIZE GENETICALLY MODIFIED PRODUCTS
We must comply with USDA regulations for outdoor releases of genetically
engineered organisms as well as other products designed for use on or with
agricultural products. Recently, the USDA released new rules that prohibit the
inclusion of genetically modified ingredients in products labeled as organic.
The USDA rules also prohibit the use of genetically modified fibers in clothing
labeled as organic. These new rules could adversely affect products under
development with our collaborators, including Dow. In addition, the USDA
prohibits genetically modified plants from being grown and transported except
pursuant to an exemption, or under special permits. We may use genetically
modified plants as screening or production hosts. Changes in USDA policy
regarding the movement or field release of genetically modified plant hosts
could adversely affect our business.
FUTURE LEGAL AND REGULATORY REQUIREMENTS MAY LIMIT OR DISCOURAGE THE USE OF OUR
GENETICALLY ENGINEERED ORGANISMS AND PRODUCTS, WHICH COULD REDUCE OUR REVENUES
We identify genes and determine their function, and we produce products from
genetically engineered organisms. The testing and production of genetically
engineered organisms and products are subject to federal, state, local and
foreign governmental regulation. Regulatory agencies administering existing or
future regulations or legislation may not allow us or our collaborators to
produce and market our genetically engineered products in a timely manner or
under technically or commercially feasible conditions. In addition, regulatory
action or private litigation could result in expenses, delays or other
impediments to our product development programs or the commercialization of
resulting products.
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The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as is applied to foods developed through traditional
plant breeding. However, genetically engineered food products will be subject to
pre-market review if these products raise safety questions or are deemed to be
food additives. Our products and the products of our collaborators that contain
genes that we have identified or determined to have a particular function may be
subject to lengthy FDA reviews and unfavorable FDA determinations if they raise
questions, are deemed to be food additives or if the FDA changes its policy. The
FDA has also announced in a policy statement that it will not require that
genetically engineered agricultural products be labeled as such, provided that
these products are as safe and have the same nutritional characteristics as
conventionally developed products. The FDA may reconsider or change its labeling
policies, or local or state authorities may enact labeling requirements. Any
such labeling requirements could reduce the demand for genetically-engineered
products. In those products where production must be performed outdoors, the
USDA prohibits genetically engineered plants from being grown and transported
except pursuant to an exemption or under strict controls. If our future products
are not exempted by the USDA, it may be impossible to sell such products.
THE PUBLIC PERCEPTION OF ETHICAL AND OTHER ISSUES RAISED BY GENETICALLY
ENGINEERED PRODUCTS AND TECHNOLOGY COULD ADVERSELY AFFECT THE MARKET FOR OUR
PRODUCTS AND TECHNOLOGIES
The commercial success of our future products, if any, and of the future
products of our collaborators, will depend in part on public acceptance of the
use of genetically engineered products including drugs, plants and plant
products. Claims that genetically engineered products are unsafe for consumption
or pose a danger to the environment may influence public attitudes. Negative
public reaction to genetically modified organisms and products could result in
greater government regulation of genetic research and resultant products,
including stricter labeling requirements, and could cause a decrease in the
demand for our products. The subject of genetically engineered organisms has
received negative publicity and aroused public debate in a number of countries,
including the United States and the countries of the European Community. The
expressed preferences of a significant portion of consumers, particularly in
Europe, but also in the United States, for non-genetically engineered food can
substantially limit the marketing of food crops that have been genetically
engineered. Ethical and other concerns about our technologies, particularly the
use of genes for commercial purposes and the products resulting from this use,
could lead to greater regulation and trade restrictions on imports of
genetically engineered products and adversely affect our market acceptance.
Governmental authorities could, for political or other reasons, limit the use of
genetic processes or prohibit the practice of our GENEWARE technology.
Consequently, our expected financial return from the Dow agreement in
agricultural gene discovery and function, and our ability to successfully
collaborate with additional companies in the agricultural industry, could be
adversely affected if this consumer trend in the future results in
non-acceptance of food products derived from genetically engineered food crops.
WE MAY BE SUED FOR PRODUCT LIABILITY AND OUR PRODUCT LIABILITY INSURANCE MAY NOT
BE ADEQUATE
The testing, marketing and sale of each of our and our collaborators' products
will entail a risk of allegations of product liability, and there can be no
assurance that substantial product liability claims will not be asserted against
us. While we have limited product liability insurance to protect against product
liability risks, there can be no assurance that adequate insurance coverage will
be available at an acceptable cost, if at all, in the future or that a product
liability claim or product recall would not materially and adversely affect our
business. Inability to obtain sufficient insurance coverage at an acceptable
cost or otherwise to protect against potential product liability claims could
prevent or inhibit the commercialization of products developed by us or our
collaborators. If we are sued for any injury caused by our or our collaborators'
products, our liability could exceed our total assets and our ability to pay the
liability.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS
Our research and development processes involve the use of hazardous materials,
including chemicals and radioactive and biological materials. Our operations
also produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages and criminal penalties in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials.
Further, it is possible that we could contaminate another party's property while
using these materials. In addition, claimants may sue us for injury or
contamination that results from our use or the use by third parties of these
materials, and our liability may exceed
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our total assets and our ability to pay the liability. In addition, compliance
with environmental laws and regulations is expensive, and current or future
environmental regulations may impair our research and development and production
efforts.
Some of our collaborators are working with these types of hazardous materials in
connection with our collaborations. In the event of a lawsuit or investigation,
we could be held responsible for any injury caused by our collaborators to
persons or property by exposure to, or release of, any hazardous materials.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR FINANCIAL
RETURNS ON OUR PRODUCTS
Our ability and that of our collaborators to commercialize therapeutics and
diagnostic products may depend in part on the extent to which reimbursement for
the cost of these products will be available from government health
administration authorities, private health insurers and other organizations.
These third parties are increasingly challenging both the need for and the price
of new medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved therapeutics and diagnostics, and we
cannot assure you that adequate third party reimbursement will be available for
any product to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in research and product development.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
PATENT PROTECTION IN THE BIOTECHNOLOGY INDUSTRY IS UNCERTAIN
We are involved in overlapping and rapidly evolving areas of biotechnology,
pharmaceutical development and basic research involving viral vectors, plant
transgenics, proteomics, functional genomics and immunotherapy. Each of these
areas has been the subject of intense research and patenting activity throughout
the world by our commercial competitors, actual and potential collaborators,
academic institutions and government researchers. In the United States, patent
applications are generally kept secret until the U.S. Patent and Trademark
Office issues a patent. We cannot determine whether or not there are patents
currently pending which, if issued, would prevent us from practicing our core
technologies, commercializing them or developing commercially viable products
based upon them.
The patent positions of biotechnology firms generally are highly uncertain and
involve complex legal and factual questions that will determine who has the
right to develop a particular product. No clear policy has emerged regarding the
breadth of claims covered in biotechnology patents in general and those relating
to gene sequences in particular. In addition, recently there has been public
debate questioning whether genomic sequence data should be patentable. The
biotechnology patent situation outside the United States is even more uncertain
and is currently undergoing review and revision in many countries. Changes in,
or different interpretations of, patent laws in the United States and other
countries might allow others to use our discoveries or to develop and
commercialize products and technologies similar to our products and technologies
without any compensation to us. Our potential collaborators or customers may
conclude that uncertainties about patent protection decrease the value of our
databases, products and services.
Throughout the world there are numerous issued patents, as well as published
European patent applications which may issue as patents, many of which relate to
our current operations, our anticipated future operations and the products we
are likely to develop. The scope of these patents is a matter of legal
interpretation and is subject to uncertainty. We have not obtained, nor do we
intend to obtain, opinions from our patent counsel that we have freedom to
conduct our commercial activities free of claims of patent infringement from
third parties. For example, we are aware of one company that has a broad
portfolio of patents which generically claim single chain antibodies and that,
in letters mailed to numerous companies including us, has asserted that any
company using or making such antibodies will require a patent license from them.
We are assessing these patents and have been informed that licenses are
available, but cannot give assurance that, if required, we will be able to
obtain a license on commercially reasonable terms.
OUR PATENT APPLICATIONS MAY NOT RESULT IN ISSUED PATENTS THAT ARE ENFORCEABLE
Our disclosures in our patent applications may not be sufficient to meet the
statutory requirements for patentability in all cases. As a result, we cannot
predict which of our patent applications will result in enforceable patents. No
assurance can be given that our patent applications will issue as patents, or
that patents issued will provide commercially meaningful protection against
competitors. Any issued patent may not provide us with competitive advantages.
Others may challenge our patents or independently develop similar products which
could result in an interference proceeding in the U.S. Patent and Trademark
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Office. Others may be able to design around our issued patents or develop
products similar to our products. In addition, others may discover uses for
genes or proteins other than those uses covered in our patents, and these other
uses may be separately patentable.
PUBLIC DISCLOSURE AND PATENTS RELATING TO GENES AND GENE SEQUENCES HELD BY
OTHERS MAY LIMIT OUR PROPRIETARY RIGHTS
The Human Genome Project and many companies and institutions have identified
genes and deposited those sequences in public databases and are continuing to do
so. These public disclosures might limit the scope of our claims or make
unpatentable subsequent patent applications on full-length gene sequences. We
are aware of certain issued patents and patent applications, and there may be
other patents and patent applications, containing subject matter such that we or
our licensees or collaborators may require a license or rights in order to
research, develop or commercialize at least some of our products. There can be
no assurance that licenses relating to such subject matter will be available on
acceptable terms, if at all.
PATENT INFRINGEMENT OR ENFORCEMENT LITIGATION OR INTERFERENCE PROCEEDINGS COULD
BE COSTLY AND DISRUPT OUR BUSINESS AND MAY PREVENT US FROM COMMERCIALIZING OUR
PRODUCTS
The technology that we use to develop our products and key resources, and those
that we incorporate in our products and technologies, may be subject to claims
by third parties, including our collaborators, that they infringe the patents or
proprietary rights of others. We also may need to enforce our patent rights in
actions against others, which could be expensive. The risk of this occurring
will tend to increase as the proteomics, genomics and biotechnology industries
expand, more patents are issued and other companies attempt to discover genes
and proteins and engage in other proteomics, genomics and biotechnology-related
businesses.
With respect to identifying proteins uniquely associated with disease states or
as targets for drug therapy, we are aware that companies have published patent
applications relating to nucleic acids encoding specific proteins. For example,
Oxford GlycoSciences plc has publicly stated that it has already filed patent
applications claiming novel utilities for known proteins and that it intends to
file additional applications as it expands its proteomics capacities. These
applications may have priority over ours or we may be forced to litigate the
issue of priority in a special proceeding known as an interference. If these
companies are issued patents, their patents may limit our ability and the
ability of our collaborators to practice under any patents that may be issued to
us. Also, even if a patent were issued to us, the scope of coverage or
protection afforded to the patent may be limited.
We are aware of a patent owned by a third party which has claims broad enough to
implicate some of our viral technologies. We have sought to initiate a
proceeding known as an interference in the U.S. Patent and Trademark Office with
respect to a third party patent relating to certain viral technologies. To date,
no interference has been declared. The patent for which we seek to declare an
interference has at least one broad and generic claim which may relate to some
of our viral technology. It cannot be predicted whether the U.S. Patent and
Trademark Office will declare an interference or if such an interference is
declared whether we will prevail. Interference proceedings can be complex and
expensive and we cannot predict the outcome of any such proceeding.
We have received, and we will most likely receive in the future, notices from
third parties alleging patent infringement. Other companies or institutions
could bring legal actions against us or our collaborators for damages or to stop
manufacturing and marketing the affected products. If any of these actions are
successful, in addition to potential liability for damages, these persons may
require us or our collaborators to obtain a license in order to continue to
manufacture or market the affected products, or may force us to terminate
manufacturing or marketing efforts.
WE MAY NOT BE ABLE TO PROTECT OUR KNOW-HOW AND TRADE SECRETS
Disclosure and use of our know-how and trade secrets are generally controlled
under confidentiality agreements. There can be no assurance, however, that:
- All confidentiality agreements will be honored
- Third parties will not independently develop equivalent technology
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- Disputes will not arise with our consultants, collaborators or others
concerning the ownership of intellectual property
- Unauthorized disclosure of our know-how or trade secrets will not occur
RISKS RELATED TO THIS OFFERING
THE PRICE OF OUR COMMON STOCK COULD BE EXTREMELY VOLATILE, AND YOU MAY NOT BE
ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE
Prior to this offering, there has been no public market for shares of our common
stock. An active trading market may not develop following completion of this
offering, and if it develops, may not be maintained. The initial public offering
price for the shares will be determined by negotiations between us and
representatives of the underwriters. This price may not be indicative of prices
that may prevail later in the market. The stock market has experienced
significant price and volume fluctuations, and the market prices of technology
companies, particularly life science companies such as ours, have been highly
volatile. In addition, broad market and industry fluctuations that are not
within our control may adversely affect the trading price of our common stock.
You may not be able to resell your shares at or above the initial public
offering price.
In addition, our quarterly operating results have fluctuated in the past and are
likely to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. In addition to the risks and uncertainties
described in this section, some of the factors that could cause our operating
results to fluctuate include:
- Expiration of contracts with collaborators or government research grants,
which may not be renewed or replaced
- The success rate of our discovery efforts leading to milestones and
royalties
- The timing and willingness of collaborators to commercialize products
which would result in royalties
- General and industry-specific economic conditions, which may affect our
and our collaborators' research and development expenditures
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters may
not meet expectations of stock market analysts and investors. In that case, our
stock price would probably decline.
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering. Our
management will have broad discretion in the application of the net proceeds.
Our management currently intends to use the net proceeds as described in "Use of
Proceeds." The failure by our management to apply these funds effectively could
have an adverse effect on our business.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION
The initial public offering price will be substantially higher than the pro
forma as adjusted net tangible book value per share of our common stock.
Investors purchasing common stock in this offering will incur immediate dilution
of $ in net tangible book value per share of common stock, based on an assumed
public offering price of $ per share, after deducting the estimated
underwriting discounts and offering expenses payable by us.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS ENABLES THEM TO COLLECTIVELY CONTROL ALL SIGNIFICANT
CORPORATE DECISIONS
Following this offering, our directors, our executive officers and entities
affiliated with our directors and our executive officers will beneficially own,
in the aggregate, approximately % of our outstanding common stock. These
stockholders as a group will be able to elect our directors and officers,
control our management and affairs and will be able to control most matters
requiring the approval of our stockholders, including any merger, consolidation
or sale of all or substantially all of our assets and any other significant
corporate transaction. The concentration of ownership will also prevent a change
of control of our company at a premium price if these stockholders oppose it.
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PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
Provisions in our amended and restated charter and bylaws and applicable
provisions of the Delaware General Corporation Law may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors. These provisions may make it more difficult or expensive for a third
party to acquire a majority of our common stock or delay, prevent or deter a
merger, acquisition, tender offer or proxy contest, which may adversely affect
our stock price.
THERE IS A LARGE NUMBER OF SHARES OF OUR COMMON STOCK THAT MAY BE SOLD FOLLOWING
THIS OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of our common stock in the public market
following this offering could cause the market price of our common stock to
decline. Upon completion of this offering, we will have outstanding an aggregate
of shares of common stock, assuming no exercise of outstanding options
or warrants. Of these shares, all of the shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, or the Securities Act, unless these shares are purchased by
affiliates. The remaining 11,828,101 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under the Securities Act. Upon the completion of this offering,
restricted shares will be available for sale in the public market, an
additional restricted shares held by some of our shareholders will be
available for sale in the public market upon the expiration of a 180-day lock-up
entered into by such shareholders and restricted shares held by our
officers and directors and related persons will be available for sale in the
public market upon the expiration of a 240-day lock-up entered into by such
persons. Of these restricted securities, shares have the right to
require us to register the shares for sale under the Securities Act six months
following the completion of this offering.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the
federal securities laws, which involve risks and uncertainties. These
forward-looking statements are not historical facts but rather are based on
current expectations, estimates and projections about our industry, beliefs and
assumptions. We use words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of these words and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus. You
should not place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this prospectus. We
undertake no obligation to update these statements or publicly release the
result of any revision to the forward-looking statements that we may make to
reflect events or circumstances after the date of this prospectus or to reflect
the occurrence of unanticipated events.
16
<PAGE> 21
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of our common stock
offered by this prospectus are estimated to be approximately $ million, or
$ million if the underwriters' overallotment option is exercised in full, at
an assumed initial public offering price of $ per share, after deducting the
estimated underwriting discounts and offering expenses payable by us. We
currently anticipate that we will use the net proceeds for:
- Research and development activities
- Product development initiatives
- Capital expenditures and
- Working capital and other general corporate purposes
In addition, we may use a portion of the net proceeds from this offering to
acquire or invest in complementary businesses or to obtain the right to use
complementary technologies. We currently have no agreements or commitments with
respect to any acquisition or investment, and we are not involved in any
negotiations with respect to any similar transaction. As of the date of this
prospectus, we can only estimate the particular uses for the net proceeds to be
received upon completion of this offering and we have not determined the amounts
we plan to spend on any of the particular uses listed above or the timing of
such expenditures. As a result, our management will have broad discretion to
allocate the net proceeds from this offering. Pending these uses, the net
proceeds from this offering will be invested in short-term, interest-bearing,
investment grade debt instruments.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
17
<PAGE> 22
CAPITALIZATION
The following table summarizes our cash and cash equivalents and marketable
securities and our capitalization as of December 31, 1999:
- on an actual basis
- on a pro forma basis giving effect to the conversion of all shares of our
convertible preferred stock into 5,627,645 shares of our common stock
upon the completion of this offering and
- on a pro forma as adjusted basis to reflect the conversion of our
convertible preferred stock and the receipt of the estimated net proceeds
from the issuance and sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discounts and offering
expenses payable by us. The pro forma as adjusted data includes the
non-cash compensation expense associated with employee stock options to
be recorded upon completion of this offering. The non-cash compensation
expense related to these options, assuming no forfeitures, will be
approximately $ million, which will be expensed in the quarter in which
this offering is completed
The number of shares in the table below excludes:
- 2,774,255 shares of common stock issuable upon exercise of stock options
outstanding at March 15, 2000 at a weighted average exercise price of
$8.10 per share
- 552,325 shares of common stock reserved for issuance under our stock
option plans at March 15, 2000 and
- 1,408,258 shares of common stock issuable upon the exercise of warrants
outstanding at March 15, 2000 at a weighted average exercise price of
$12.33 per share
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the accompanying notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
------------------------------------
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
In thousands, except share data
Cash and cash equivalents and marketable securities......... $ 14,099 $ 14,099 $
======== ======== ========
Long-term debt obligations, net of current portion.......... $ 2,457 $ 2,457 $ 2,457
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized,
5,605,813 shares issued and outstanding, actual;
10,000,000 shares authorized and no shares issued and
outstanding, pro forma and pro forma as adjusted....... 38,713 -- --
Common stock; 20,000,000 shares authorized, 6,200,456
shares issued and outstanding, actual; 20,000,000
shares authorized and shares issued and
outstanding, pro forma and pro forma as adjusted....... 52,739 91,452
Shareholder notes receivable.............................. (112) (112) (112)
Deferred compensation..................................... (7,825) (7,825) (7,825)
Accumulated deficit....................................... (78,997) (78,997)
-------- -------- --------
Total stockholders' equity............................. 4,518 4,518
-------- -------- --------
Total capitalization................................... $ 6,975 $ 6,975
======== ======== ========
</TABLE>
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<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the public offering price per share of our common
stock and the pro forma as adjusted net tangible book value per share of our
common stock after this offering. Our pro forma net tangible book value at
December 31, 1999 was approximately ($1.1) million, or ($.09) per share of
common stock. Pro forma net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding after giving effect to the conversion of all of our
outstanding convertible preferred stock into shares of our common stock. After
giving effect to the issuance and sale of shares of our common stock
in this offering at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discounts and offering expenses
payable by us, our pro forma as adjusted net tangible book value at December 31,
1999, would have been $ , or $ per share. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to our new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December
31, 1999............................................... $
Increase per share attributable to new investors..........
--------
Pro forma as adjusted net tangible book value per share
after the offering........................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, at December 31, 1999, on a pro forma as adjusted
basis, the total number of shares of common stock outstanding and the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discounts and offering expenses payable by
us:
<TABLE>
<CAPTION>
--------------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ 11,828,101 % $52,933,000 % $4.48
New investors....................................
---------- ----- ----------- ------
Totals........................................... 100.0% $ 100.0%
========== ===== =========== ======
</TABLE>
The above computations are based on the number of shares of common stock
outstanding as of December 31, 1999 and exclude:
- 2,774,255 shares of common stock issuable upon exercise of stock options
outstanding at March 15, 2000 at a weighted average exercise price of
$8.10 per share
- 552,325 shares of common stock reserved for issuance under our stock
option plans at March 15, 2000 and
- 1,408,258 shares of common stock issuable upon the exercise of warrants
outstanding at March 15, 2000 at a weighted average exercise price of
$12.33 per share.
To the extent that any of these options or warrants are exercised, there could
be further dilution to new investors. For additional information regarding these
shares, options and warrants, see "Capitalization," "Management -- Benefit
Plans," "Description of Capital Stock" and Note 10 of Notes to Consolidated
Financial Statements.
19
<PAGE> 24
SELECTED FINANCIAL DATA
The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and the related
notes thereto included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from our consolidated financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, which are included elsewhere in this
prospectus. The statements of operations data for the years ended December 31,
1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997
are derived from our audited consolidated financial statements not included in
this prospectus. The consolidated statement of operations data for the year
ended December 31, 1999 and the consolidated balance sheet data as of December
31, 1999 give effect to our acquisition of Large Scale Proteomics on February 1,
1999.
The unaudited pro forma net loss per share is calculated on a pro forma basis
after giving effect to the conversion of all shares of our convertible preferred
stock into 5,627,645 shares of our common stock upon completion of this
offering. The unaudited pro forma net loss per share does not give effect to the
non-cash compensation expense associated with employee stock options that will
become exercisable upon completion of this offering. The non-cash compensation
expense related to these options, assuming no forfeitures, will be approximately
$ million. These charges are based upon an assumed initial offering price of
$ per share.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
In thousands, except share and per share data ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues........................................... $ 836 $ 797 $ 2,108 $ 3,394 $ 16,090
Costs and expenses:
Development agreements........................... 757 300 1,735 2,565 7,988
Research and development......................... 5,750 8,395 5,872 6,973 9,163
General, administrative and marketing............ 1,804 2,217 3,363 3,492 8,333
Purchased research and development............... -- -- -- -- 19,783
---------- ---------- ---------- ---------- -----------
Total costs and expenses.................. 8,311 10,912 10,970 13,030 45,267
---------- ---------- ---------- ---------- -----------
Loss from operations............................... (7,475) (10,115) (8,862) (9,636) (29,177)
Total other income................................. 151 879 2,293 215 1,450
---------- ---------- ---------- ---------- -----------
Net loss before provision for income taxes......... (7,324) (9,236) (6,569) (9,421) (27,727)
Provision for income tax........................... -- -- -- -- 190
---------- ---------- ---------- ---------- -----------
Net loss........................................... (7,324) (9,236) (6,569) (9,421) (27,917)
Warrant accretion.................................. -- -- -- (1,224) (5,353)
---------- ---------- ---------- ---------- -----------
Loss applicable to common stockholders............. $ (7,324) $ (9,236) $ (6,569) $ (10,645) $ (33,270)
========== ========== ========== ========== ===========
Net loss per share -- basic and diluted............ $ (1.22) $ (1.51) $ (1.06) $ (1.70) $ (5.38)
========== ========== ========== ========== ===========
Weighted average shares outstanding -- basic and
diluted.......................................... 6,012,758 6,120,288 6,221,490 6,244,516 6,183,485
========== ========== ========== ========== ===========
Unaudited pro forma net loss per share -- basic and
diluted.......................................... $ (2.88)
===========
Pro forma weighted average shares
outstanding -- basic and diluted................. 11,553,650
===========
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------
AS OF DECEMBER 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
In thousands -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 3,864 $ 4,237 $ 2,708 $ 3,484 $ 6,975
Marketable securities....................................... 15,138 5,261 -- 4,086 7,124
Working capital (deficit)................................... 19,518 10,039 1,385 2,514 (1,514)
Total assets................................................ 23,130 14,238 8,388 17,590 31,603
Long-term debt, net of current portion...................... -- -- 205 1,445 2,457
Convertible preferred stock................................. 8,531 8,531 8,894 15,848 38,713
Accumulated deficit......................................... (19,277) (28,513) (35,082) (45,727) (78,997)
Total stockholders' equity.................................. 22,303 12,167 6,261 5,543 4,518
</TABLE>
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis by our management of our financial
condition and results of operations should be read in conjunction with our
consolidated financial statements and the related notes thereto included
elsewhere in this prospectus. This Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this prospectus
contain forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors."
OVERVIEW
We apply our proprietary proteomics and functional genomics technologies, ProGEx
and GENEWARE, to enable the transformation of proteomic and genomic information
into multiple product opportunities, such as drug targets, therapeutics and
diagnostics for drug effectiveness and toxicity.
Prior to February 1999, we were primarily engaged in the development and
commercialization of genomics technologies. In February 1999, we acquired 92.5%
of the outstanding common stock of Large Scale Proteomics, a company primarily
engaged in the development of proteomics technologies. In March 2000, we
acquired the remaining 7.5% of Large Scale Proteomics' common stock. This
acquisition was recorded using the purchase method of accounting.
We recognize revenues from our collaborative agreements, which typically provide
for research funding, technology access fees and milestone payments. Technology
access fees and milestone payments are recorded as deferred revenue and are
amortized ratably over the life of the related collaborative agreement. Research
funding is recognized as it is earned.
In September 1998, we entered into a three-year collaboration and license
agreement with Dow. The Dow agreement provides funding for sponsored genomics
research, royalties upon sales by Dow of products that result from this
collaboration and payments when specific milestones are reached. Revenues from
the Dow agreement represented 88% and 84% of our revenues during 1999 and 1998.
We have incurred significant losses in each year since our inception in 1987. As
of December 31, 1999, we had an accumulated deficit of $79.0 million. We expect
to incur additional losses as we expand our research and development efforts,
make investments in strategic collaborations and enhance our technologies. We
anticipate that clinical studies for some of our products under development and
internally funded research projects will be started or expanded after this
offering. The resulting increase in expenses could delay our profitability and
result in increased annual net losses.
As a result of stock options granted in December 1999, we recorded deferred
compensation of $7.9 million. This amount will be amortized ratably over the
three year vesting period of the options. In addition, we granted officers and
certain key employees options that will become exercisable upon our initial
public offering. As a result, non-cash compensation expense will be recognized
upon the completion of this offering based on the difference between the
exercise price of these options and the initial public offering price of our
common stock. The non-cash compensation expense related to these option grants,
assuming no forfeitures, will be approximately $ million.
RESULTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
Revenues. Revenues in 1999 were $16.1 million, an increase of $12.7 million, or
374%, over 1998. Revenues in 1998 were $3.4 million, an increase of $1.3
million, or 61%, over 1997. Revenues earned under the Dow agreement were $14.2
million in 1999 and $2.9 million in 1998. The increase in 1999 revenues from the
Dow agreement reflects a full year of research activities as compared to four
months in 1998. The increase in 1999 revenues is also attributable to $1.8
million of revenues from the operations of Large Scale Proteomics since February
1, 1999, the effective date of its acquisition.
Development agreement expenses. Development agreement expenses relate to
research activities incurred in connection with our collaborative agreements.
Development agreement expenses in 1999 were $8.0 million, an increase of $5.4
million, or 211%, over 1998. Development agreement expenses in 1998 were $2.6
million, an increase of $830,000, or 48%, over 1997. Research activities under
the Dow agreement accounted for $6.7 million in 1999 and $1.5 million in 1998 of
our development
21
<PAGE> 26
agreement expenses. The increase in development agreement expenses in 1999 from
the Dow agreement reflects the inclusion of a full year of research activities
as compared to four months in 1998. Additionally, $1.3 million of the increase
in 1999 was attributable to the operations of Large Scale Proteomics since
February 1, 1999. We expect that development agreement expenses will increase if
we are required to expand our work force and facilities to meet commitments
under any new collaborative agreements.
Research and development expenses. Research and development expenses in 1999
were $9.2 million, an increase of $2.2 million, or 31%, over 1998. Research and
development expenses in 1998 were $7.0 million, an increase of $1.1 million, or
19%, over 1997. Approximately $1.1 million of the increase in 1999 was
attributable to the inclusion of the operations of Large Scale Proteomics since
February 1, 1999. The remainder of the increase in 1999 and substantially all of
the increase in 1998 were largely attributable to the addition of research
personnel, increases in research funding paid to third persons and new acquired
or expanded research facilities in Vacaville, California, Owensboro, Kentucky
and Rockville, Maryland. We anticipate that research and development expenses
will continue to increase as we make expenditures for clinical trials to develop
pharmaceutical products and internally fund research projects.
General, administrative and marketing expenses. General, administrative and
marketing expenses in 1999 were $8.3 million, an increase of $4.8 million, or
139%, over 1998. General, administrative and marketing expenses in 1998 were
$3.5 million, an increase of $129,000, or 4%, over 1997. The increase in 1999
was partially due to an increase in legal and regulatory fees of $1.2 million
related to our patents and a charge of $1.5 million related to previously
capitalized patent costs. Additionally, $2.0 million of the increase in 1999 was
attributable to the inclusion of operations of Large Scale Proteomics since
February 1, 1999. We anticipate that our legal and regulatory expenses related
to our patents will continue to increase as we file, prosecute and defend new
and existing patents. We also expect general, administrative and marketing
expenses to increase as we expand our infrastructure to accommodate our
anticipated growth.
Purchased research and development expenses. Purchased research and development
expenses in 1999 were $19.8 million. This amount represents a charge for
in-process research and development acquired in connection with our acquisition
of Large Scale Proteomics. We did not have purchased research and development
expenses in 1998 or 1997.
Purchased research and development expenses represent the value of purchased
in-process research and development projects that had not reached technological
feasibility at the date of acquisition. No alternative future uses or markets
were identified for these projects because of their unique qualities. The
purchased research and development was valued by an independent appraiser using
the risk-adjusted cash flow approach, which includes an analysis of the
projected future cash flows that were expected to result from the progress made
on each of the in-process projects prior to the date of acquisition and the
risks associated with achieving such cash flows. The value allocated to
purchased in-process research and development was expensed at the date of
acquisition. Projects which had already been commercialized at the date of the
valuation were valued and recorded as core technology.
Future cash flows for in-process research and development were estimated by
first forecasting, on a project-by-project basis, total revenues expected to
result from sales of each in-process project. Revenues were not anticipated from
the in-process research and development projects until approximately one year
into the forecast. Appropriate operating expenses, cash flow adjustments and
contributory asset returns were deducted from projected future revenues, and
adjustments were made to remove the value contributed by core technology. No
anticipated expense reductions due to synergies between Large Scale Proteomics
and us were assumed. The analysis resulted in a forecast of net returns on each
in-process project. These net returns were then discounted to a present value at
discount rates that incorporate the project specific risks associated with each
purchased in-process research and development project. The project specific risk
factors considered included the complexity of the development effort, the
likelihood of achieving technological feasibility and the likelihood of market
acceptance. The applied discount rate of 50% was believed to adequately account
for the additional risks associated with the in-process technologies over other
technologies existing at the acquisition date.
The forward looking data employed in the analysis of in-process research and
development were based upon our estimate of future performance of our business.
We believe the assumptions used were reasonable. However, the assumptions we
used may be incomplete or inaccurate, and unanticipated events and circumstances
may occur, which could cause a material adverse effect on our financial
condition and results of operations. The forecasted results used in the analysis
for the in-process projects have not varied significantly from the actual
results achieved through December 31, 1999.
22
<PAGE> 27
A brief description of purchased in-process research and development projects is
set forth below, including the status of products within each project at the
acquisition date.
- - Proteomics -- The proteomics technology applies sample preparation and
fractionation high-throughput, high-resolution two-dimensional gels, mass
spectrometry, databases and bioinformatics software to the discovery and
development of drugs, diagnostics and agricultural chemicals. The proteomics
technology was expected to be completed in 2000.
- - Virus -- The virus detection technology is intended for the rapid discovery of
novel yet difficult to propagate viruses, addressing a wide range of suspected
viral diseases. Virus detection technology was expected to be completed in
2003.
Other income. Total other income in 1999 was $1.5 million, an increase of $1.3
million over 1998. Total other income in 1998 was $215,000, a decrease of $2.1
million from 1997. The increase in 1999 was attributable to a $1.3 million
litigation settlement. The decrease in 1998 was due to $2.0 million received in
1997 from the settlement of a litigation and a decrease in interest income.
Provision for income tax. In 1999, although we had a net loss of $27.9 million,
we had taxable income for federal and state income tax purposes which we offset
by our use of federal and state net operating loss carryforwards. As a result,
we incurred alternative minimum taxes of $190,000. Taxable income in 1999 was
primarily the result of taxable milestone payments under the Dow agreement and
the charge for in-process research and development which was not deductible for
tax purposes. We incurred taxable net losses in 1998 and 1997 and, consequently,
did not pay any federal or state income taxes in those years. At December 31,
1999, we had net operating loss carryforwards of approximately $29.3 million for
federal tax purposes and $8.0 million for state tax purposes available to reduce
future taxable income. Our federal net operating loss carryforwards expire
between 2009 through 2018 and our state net operating loss carryforwards expire
between 2002 through 2003. In addition, at December 31, 1999, we had research
and development credit carryforwards and alternative minimum tax carryforwards
of approximately $2.7 million available for federal tax purposes and $1.9
million for state tax purposes. These federal carryforwards expire between 2003
through 2013 and these state carryforwards do not expire. We have provided a
100% valuation allowance against the related deferred tax assets as our ability
to realize such tax benefits is not assured. Our ability to use these
carryforwards is subject to significant limitations.
Net loss. Net loss in 1999 was $27.9 million, an increase of $18.5 million over
1998. Net loss in 1998 was $9.4 million, an increase of $2.9 million over 1997.
Annual net losses have fluctuated depending on revenues from our collaborative
agreements, research and development expenses and acquisition related charges.
LIQUIDITY AND CAPITAL RESOURCES
Our annual need for funds has generally increased reflecting the expanding scope
of our research and development activities. Since our inception, we have funded
our operations primarily through payments from our collaborative agreements of
$56.6 million, the sale of $52.9 million of our equity securities, other income
of $6.7 million and loans of $4.6 million.
At December 31, 1999, we had cash and cash equivalents of $7.0 million. Net cash
provided by operating activities of $6.3 million in 1999 was principally due to
$16.6 million of milestone payments and $7.8 million of research funding
received under the Dow agreement less $21.4 million paid to our suppliers and
employees. Net cash provided by operating activities of $547,000 in 1998 was
principally due to the $8.6 million technology access fee and $2.8 million of
research funding received under the Dow agreement less $11.6 million paid to our
suppliers and employees. Net cash used in operating activities of $4.3 million
in 1997 was principally due to $2.0 million received under a litigation
settlement and $2.1 million received from customers offset by $8.8 million paid
to our suppliers and employees. Maintenance of positive net cash provided by
operating activities will depend upon our entering into new collaboration
agreements and the level of internally funded research and development
activities.
Net cash used in investing activities of $8.4 million in 1999 included $5.1
million for purchases of property, plant and equipment. Net cash used in
investing activities of $8.6 million in 1998 included $3.8 million for purchases
of property, plant and equipment. Net cash from investing activities of $3.1
million in 1997 was derived from $5.2 million in matured marketable securities,
net of purchases, which was partially offset by $1.7 million for purchases of
property, plant and equipment. We anticipate that our capital expenditures will
increase in the future to meet the demands from new collaboration agreements and
research and development efforts. We may use a portion of our cash to acquire or
invest in complementary businesses, products or technologies, or to obtain the
right to use such complementary technologies.
23
<PAGE> 28
Net cash provided by financing activities of $5.6 million in 1999 includes $3.4
million of milestone payments which were allocated to warrants issued in
connection with the Dow agreement and net proceeds of $2.2 million from loans
related to our $5.0 million equipment financing arrangement. Net cash provided
by financing activities of $8.8 million in 1998 was principally from the
issuance and sale of $7.0 million of our convertible preferred stock, $1.4
million from the issuance of a warrant to Dow and net proceeds of $312,000 from
loans for equipment financing. Borrowings under this equipment financing bear
interest at the commercial bank prime interest rate payable in monthly
installments through October 2001. At December 31, 1999, $4.1 million was
outstanding under this arrangement. Net cash used in financing activities of
$330,000 in 1997 was primarily the result of principal payments on long-term
debt.
In the future, our liquidity and capital resources will depend upon, among other
things, the level of our research and development activities, development,
clinical, regulatory and marketing expenses and funding from our collaborations.
We believe that cash flows from operations together with the anticipated net
proceeds of this offering will be adequate to fund our anticipated cash and
working capital requirements for at least the next 12 months. During or after
this period, if cash generated by our operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for us beginning in the first quarter of the
fiscal year beginning January 1, 2001. The statement requires balance sheet
recognition of derivatives as assets or liabilities measured at fair value.
Accounting for gains and losses resulting from changes in the values of
derivatives is dependent on the use of the derivative and whether it qualifies
for hedge accounting. We do not believe that the adoption of SFAS No. 133 will
have a material impact on our financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. This accounting bulletin, as amended in March 2000, is
effective for us beginning in the second quarter of our fiscal year beginning
January 1, 2000. We do not believe that the adoption of SAB 101 will have a
material impact on our financial statements.
INFLATION
We believe that inflation has not had a material adverse impact on our business
or operating results during the periods presented.
DISCLOSURES ABOUT MARKET RISK
Interest rate risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio and debt obligations.
Investment portfolio
Our investments portfolio consists of cash, cash equivalents and short-term
marketable securities. Cash equivalents are highly liquid investments with
original maturities of three months or less and are stated at cost. Cash
equivalents are generally maintained in money market accounts or with maturity
dates of less than 90 days. We do not believe our exposure to interest rate risk
is material for these balances, which totaled $7.0 million at December 31, 1999.
Our short-term marketable securities are classified as held-to-maturity and,
consequently, are recorded on the consolidated balance sheet at historical cost.
Short-term marketable securities totaled $7.1 million at December 31, 1999 and
consisted of commercial paper.
We do not use derivative financial instruments in our short-term investment
portfolio, and we place our investments with high quality issuers and, by
policy, limit the amount of credit exposure to any one issuer.
If market interest rates were to change immediately and uniformly by 10% from
levels at December 31, 1999, the fair value of our cash equivalents and
short-term marketable securities would change by an insignificant amount.
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Debt obligations
Our debt obligations consist of notes payable maturing from 2000 to 2008.
Substantially all of our debt is indexed to the commercial bank prime interest
rate, 8.5% at December 31, 1999. If market interest rates were to change
immediately and uniformly by 10% from levels at December 31, 1999, our interest
expense would change by a similar percentage.
Foreign currency
We have operated primarily in the United States and all revenues to date reflect
amounts payable in U.S. dollars. We have not had any material exposure to
foreign currency rate fluctuations relating to revenues or expenses.
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BUSINESS
OVERVIEW
Large Scale Biology applies its proprietary proteomics and functional genomics
technologies to develop products and establish commercial collaborations with
pharmaceutical, biotechnology, chemical and other life sciences companies. Our
key proprietary technologies, ProGEx and GENEWARE, supported by our patent
portfolio, provide us with a broad range of commercial opportunities. We believe
that we can apply our proprietary technologies to enable the transformation of
proteomic and genomic information into multiple product opportunities such as
drug targets, therapeutics, diagnostics and the evaluation of drug effectiveness
and toxicity.
Proteomics is the study of proteins. All biological processes, including
diseases and responses to therapeutics, involve changes in proteins. Despite the
near complete sequencing of the human genome, the function of proteins and genes
is not fully understood. Our automated, high-throughput ProGEx system provides a
snapshot of the protein composition, or proteome, of cells and tissues. We use
our ProGEx system to rapidly identify changes in proteins that are associated
with diseases or with a therapeutic's effects. We believe that proteomics will
become crucial in discovering and developing therapeutics, and in predicting,
diagnosing and monitoring diseases. Our ProGEx system provides information that
is unavailable using genomics technologies alone.
Functional genomics is the study of what genes do. Genes determine where, when,
how and which proteins are made in a living organism. GENEWARE is our
proprietary, automated technology for rapidly inserting genes into host
organisms for novel gene discovery and gene function analysis. We also intend to
apply this technology to efficiently produce human therapeutic and other
commercially useful proteins.
We are using our proprietary technologies to continue to build our key resources
for use in product discovery, development and production by us and our
collaborators. We intend to integrate our information on gene function with our
proteomic databases by correlating the function of genes with proteomic
information from normal and diseased cells and tissues to identify drug targets
and therapeutic proteins.
We are using our ProGEx system to develop our:
- HUMAN PROTEIN INDEX, or HPI, database -- our database of the detailed
protein composition of all normal human tissues and cells
- MOLECULAR ANATOMY AND PATHOLOGY, or MAP, database -- our database that
describes the changes in protein composition associated with disease
- MOLECULAR EFFECTS OF DRUGS, or MED, database -- our database that
describes changes in protein composition associated with the
administration of therapeutics and other treatments
- Portfolio of marker proteins -- proteins significantly correlated with
disease or a therapeutic's effects, for use as drug targets, therapeutic
proteins or diagnostics
We are using our GENEWARE technology to:
- Identify novel genes
- Determine gene functions
- Manufacture therapeutic proteins, vaccines and other commercially useful
proteins
We believe that by building our portfolio of strategic collaborations, we will
generate revenue and establish a long-term economic interest in product
pipelines of selected collaborators. Since our inception, we have established
collaborations with pharmaceutical, biotechnology, chemical and other life
sciences companies as well as research institutions and government agencies. We
generated $16.1 million of revenues in 1999 from these arrangements. We
currently have seven ongoing research and technology development programs and
collaborations.
We structure our current collaborations in a variety of ways. We obtain
immediate funding in the form of ongoing committed research and development
payments and, in some cases, technology access fees from our collaborators. In
some instances, we
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also share in the long-term value of the products that we assist our
collaborators in developing through the retention of some product rights and
from royalty fees from the sale of products developed using our technologies.
In September 1998, we entered into a three-year contract with Dow for its
exclusive use of our GENEWARE technology for development of functional genomics
in selected agricultural and industrial chemical categories. During this
collaboration, we and Dow have identified commercially significant genes for
specific agricultural and industrial uses that will be marketed by Dow and its
affiliates. We retain the right to use any of the identified genes resulting
from this collaboration for uses in other categories not allocated to Dow. Dow
can elect to continue this collaboration beyond September 2001 by paying
additional technology access fees. If Dow does not elect to continue this
collaboration, we will be able to market to others access to our technology for
agricultural and industrial chemical purposes. Our revenues from Dow in 1999
were $14.2 million.
We file patent applications and trademarks to protect our intellectual property.
As of March 15, 2000, our proprietary technologies are protected by 19 issued
and 47 pending U.S. patents and 12 issued and 44 pending foreign patents
relating to proteomics, genomics and bioprocessing. Because we discover
proprietary proteins and determine the function of genes, we believe that
patents limited to the DNA sequence of genes are not important to the success of
our company.
STRATEGY
Our principal objective is to commercialize products and technologies as we
establish a leadership position in proteomics and functional genomics. We use
our proprietary technologies to identify, quantify and determine the function of
proteins in cells and tissues. In addition, our technology can be used to
determine gene functions as well as to cost-effectively produce proteins.
The key elements of our strategy include the following:
Becoming the definitive source of information about human proteins. We are
accelerating the generation of our HPI database. The rapid progress being made
in sequencing the entire human genome has created additional opportunities for
us to integrate our proprietary protein information with information on the
function of human genes. We intend to derive revenues from multiple sources
using our HPI database. We plan to offer value-added information to our
collaborators, based on the depth of information and relational capabilities of
our databases, and provide unique content to database companies. We also intend
to use our databases in our internal research and development projects to
identify novel drug targets, therapeutic proteins and diagnostic marker
proteins.
Identifying potential drug targets, therapeutic proteins and diagnostics. We
plan to integrate our proprietary technologies to identify potential drug
targets, therapeutic proteins and diagnostics. We have previously applied our
GENEWARE technology to discover and determine the function of plant genes, and
we are now expanding these capabilities for use in human and animal systems. We
intend to commercialize these technologies with collaborators as well as apply
them to our internal research and development projects.
Becoming the leading provider of protein information for protein biochips and
other diagnostic tools. We can identify proteins, known as markers, that
correlate with diseases or therapeutic effects. Our short-term strategy is to
license these marker proteins individually to collaborators interested in using
them as drug targets or as diagnostic tools. Our long-term strategy is to
provide protein information for protein biochips that are capable of
simultaneously measuring hundreds or thousands of marker proteins. We believe
that biochips and other diagnostics will enable the measurement of critical
health and drug-related conditions quickly and affordably. We plan to
collaborate with one or more technology companies that can develop and
commercialize protein biochips and other diagnostic tools.
Clinically testing our first therapeutic product. We plan to conduct clinical
trials to ascertain the safety and efficacy of our patient-specific vaccine for
the treatment of non-Hodgkins lymphoma. We intend to establish a collaboration
for the further development and commercialization of this vaccine once efficacy
endpoints are established.
Commercializing our protein production technology. Our protein production
technology, based on our GENEWARE technology, allows the rapid and efficient
production of proteins. We intend to manufacture our own therapeutic proteins
and will seek to manufacture proteins for our clients. Part of the value of
proteins discovered using our proteomics technology will be obtained by
manufacturing these proteins ourselves for use directly as protein therapeutics
to treat diseases. We have successfully produced a number of our own candidate
therapeutic proteins, including a patient-specific vaccine for the treatment for
non-Hodgkins lymphoma and alpha-galactosidase, which may be a treatment for
Fabry's disease.
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BACKGROUND
All living things are made up of one or more cells. Although scientists still
have much to learn about how cells actually function, we do know that all cells
have several basic components. Inside each plant and animal cell is a nucleus,
which contains deoxyribonucleic acid, or DNA, that makes up the genetic code.
Genes are composed of DNA, and when a gene is turned on, or expressed, the
genetic code is copied and converted into a cell component called messenger
ribonucleic acid, or mRNA. This messenger carries the genetic code to a specific
part of the cell outside the nucleus where proteins are made. Beyond carrying
the genetic code for a protein, mRNA is not thought to be functional. The
complete genetic code for humans, the human genome, is expected to be known
within the next year.
The proteins that are produced from the genetic code are the essential
components of cells. Changes in protein structure, quantity and location occur
in all diseases, including those that are due to genetic defects. Therefore, we
believe that proteomics will become crucial in discovering and developing drugs
that treat disease, and in predicting, diagnosing and monitoring diseases.
Proteins can also serve as therapeutics themselves, a well-known example of
which is insulin.
We believe that biotechnology is moving from the era of gene discovery into an
era focused on identifying the functions of the proteins these genes produce.
Determining function involves the discovery of the role or relationship that a
gene or a protein has with a particular biological process, and the consequences
of modulating its activity. Gene function cannot necessarily be inferred from
DNA sequence or mRNA levels, nor reliably derived from comparison to other genes
of known function. Discovering gene functions requires the integration of gene
sequence, protein function and an understanding of how proteins interact with
each other. We believe our key technologies, ProGEx and GENEWARE, address these
needs.
OUR TECHNOLOGY AND ITS ADVANTAGES
ProGEx System -- Our Proteomics Technology
We have designed and assembled a series of robotic components in an automated,
modular and scaleable system, which we call our ProGEx system. Our
high-throughput and high resolution ProGEx system produces a quantitative and
qualitative snapshot of the protein composition, or the proteome, of cells or
tissues in a highly reproducible manner. In addition, our ProGEx system
determines the relative amounts of each protein and obtains information
regarding the location of the protein in cells and tissues.
We believe the automated nature of our ProGEx system removes the variability
inherent in more traditional, manually operated proteomics systems. This allows
us to achieve highly reproducible results which are crucial when comparing data
over time from the numerous types of drug treatments and disease tissues in our
databases. The high degree of resolution obtainable using our ProGEx system
enables us to separate individual proteins out of complex mixtures, which is
critical for the identification of marker proteins that may be useful as drug
targets or diagnostics. Traditional methods are generally incapable of
separating and identifying the low abundance proteins we are able to detect and
characterize with our ProGEx system.
Our ProGEx system is based on the integration of a series of methods that begins
with our proprietary sample preparation and separation process followed by the
use of our proprietary two-dimensional gels, mass spectrometry and sophisticated
bioinformatics software. ProGEx gels separate the proteins in complex mixtures,
such as those obtained from cell or tissue samples. This is achieved using a
two-step protein separation technique. Proteins are separated first along one
dimension according to their composition and then along a second dimension
according to their size. This results in a rectangular map on which individual
proteins appear as small spots. The size of each spot in a ProGEx gel indicates
the relative amount of that protein present in the sample.
We then use mass spectometry to identify the proteins separated by our ProGEx
gels. Mass spectrometry is a physical measurement technique that measures the
masses or molecular sizes of proteins and fragments of proteins. We use our
proprietary, high-throughput, robotic system to selectively remove protein spots
from ProGEx gels and to fragment the proteins. The mass of each protein fragment
is measured by mass spectrometry. This data can be used to identify the protein.
We also use mass spectrometry to characterize unknown proteins.
Our ProGEx system generates large amounts of data which must be effectively
organized into databases to allow for its efficient use. Bioinformatics is the
use of computer software to store and analyze biological data. Our proprietary
KEPLER software allows us to analyze and integrate this data into our database.
Our proprietary data-mining tools allow us to query and interpret all
information within our databases.
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GENEWARE Technology -- Our Genomics and Manufacturing Technology
We use our GENEWARE technology to insert genes rapidly and temporarily into host
organisms for gene discovery, gene function analysis and protein production. Our
proprietary GENEWARE viral vectors carry a gene sequence of interest into a cell
of a host organism. The gene sequence is converted into mRNA outside the nucleus
of the cell and then into protein. With our GENEWARE technology, it is not
necessary to go through the traditional methods of inserting a gene into the
genome of the host organism. To discover gene function, a gene can be inserted
into the cell, causing changes which we analyze. Our proprietary GENEWARE
technology allows us to turn on or turn off protein production from unknown gene
sequences, thereby enabling us to determine the function and potential
commercial use of those genes and proteins.
Our GENEWARE technology also allows us to manufacture therapeutic proteins,
peptides and other molecules. We believe our GENEWARE technology offers
significant time and cost advantages over traditional genetic engineering
systems because it does not require alteration of the genome of the host
organism. We are completing a pharmaceutical manufacturing facility in
Owensboro, Kentucky for the custom production of protein products using GENEWARE
technology.
Since 1991, we have conducted USDA-approved field trials to demonstrate that our
GENEWARE technology is environmentally safe. We believe our GENEWARE technology
is environmentally safe because the virus and the genes we insert cannot be
incorporated into the plant genome and thus cannot be transmitted to the next
generation of the plant in the seed or pollen. Our GENEWARE viruses eventually
lose the foreign gene that has been inserted and the virus then reverts to a
weakened version of the naturally occurring virus.
COMMERCIAL OPPORTUNITIES
ProGEx applications
Expansion of our proteomics databases. We are using our ProGEx system to
continue to expand our proteomic databases. These include our HPI, MAP and MED
databases. In order to mine the extensive information, consisting of millions of
protein measurements, contained in the databases, we have developed a unique
proteomic database architecture and advanced bioinformatics software tools
allowing us to correlate information from all three of our databases. We intend
to derive revenue from our databases from multiple sources, including providing
unique content to database companies and identifying novel drug targets,
therapeutic proteins and diagnostic marker proteins for us and our
collaborators.
Identification of disease-specific marker proteins for use as drug targets and
diagnostics. We use our ProGEx system to obtain information about proteomes from
thousands of cell and tissue samples in a matter of weeks. This process takes
significantly longer using other methods. Using our ProGEx system we produce
snapshots of proteomes from normal and diseased cell and tissue samples that we
compare to each other to identify marker proteins associated with disease that
are potential drug targets or diagnostics. This is a critical step in the drug
discovery and development process and is a difficult and labor-intensive task to
perform using traditional methods. We also intend to correlate our proteomic
information with genomic information on gene function to identify drug targets
and therapeutic proteins. We expect to derive value from marker proteins in
several ways, including individually licensing them as potential drug targets or
as diagnostic tools to numerous collaborators, as well as developing protein
therapeutics ourselves. In addition, our long-term strategy is to provide
protein information for protein biochips that are capable of simultaneously
measuring hundreds or thousands of marker proteins.
Monitoring and predicting specific drug effects. We use our ProGEx system to
obtain a snapshot of the proteome from a patient, laboratory animal, cell or
tissue sample before and after treatment with a specific drug to identify the
effects of that drug on the proteome. The binding of a specific drug to its
protein target typically affects the abundance or properties of numerous
proteins in a cell or tissue sample. These changes in protein levels and
properties generally correlate with therapeutic action and toxic side-effects,
if any, of the specific drug. We believe that understanding these changes will
allow us to predict the therapeutic and toxic effects of specific drug
candidates. We intend to form collaborations with pharmaceutical and
biotechnology companies to use our technology to monitor and predict the effects
of drug candidates in development.
Toxicology. Using our ProGEx system, we and our collaborators have identified
changes that correlate with the toxic side-effects of some drugs. For example,
in collaboration with Novartis AG, we examined the kidney damage caused by the
immunosuppressant drug Cyclosporine A. Cyclosporine A is widely used to prevent
the rejection of transplanted kidneys and hearts. We identified a protein
playing a critical role in the damage. The identity of the protein provided a
critical link in understanding what causes kidney damage during cyclosporine
treatment, and whether the damage could be reduced by altering the drug's
structure. Using this general approach, we can rapidly identify and potentially
understand toxicological
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mechanisms associated with existing drugs and drugs in development. We believe
that our ProGEx system may significantly reduce the costs and time associated
with this traditional bottleneck in the drug development process.
GENEWARE applications
We use our GENEWARE technology to discover the function of genes and for the
production of proteins. We have built a database of information about gene
function, initially in plants, and are applying this technology to other
organisms. Some of the commercial applications of our GENEWARE technology
include:
Identifying the function of human genes. We are developing GENEWARE technology
that is capable of delivering target genes into human and other mammalian cell
cultures. We examine the specific structural biochemical and physiological
effects of expressing or inactivating genes in mammalian cells. We intend to
integrate our genomic information on gene function with our proteomic databases
by correlating the function of genes with proteomic information from normal and
diseased cells and tissues to identify drug targets and therapeutic proteins.
Identifying the function of plant genes. We have established a proprietary
method for the rapid, simultaneous screening of entire plant genomes of major
commercial crops in significantly less time than can be done using traditional
technologies. We are able to routinely screen 400 unique genes per day and
identify their functions in plants based on focused, high-throughput robotic
tests. We are currently commercializing this capability in collaboration with
Dow, and expect to form other collaborations in forestry and horticulture.
Producing proteins on a large scale. We have developed a proprietary technology
for the large-scale recovery and purification of protein products produced in
plants. We use our proprietary GENEWARE viruses to insert a gene into a plant so
that the plant produces the protein of interest. The plants are harvested and
put through a series of industrial processes to rapidly separate and purify the
protein product. We have successfully produced and purified a number of
potential protein therapeutic products including a patient-specific vaccine
against non-Hodgkin's lymphoma and alpha-galactosidase, which may be a treatment
for Fabry's disease.
COLLABORATIONS
Our collaboration strategy is to develop multiple commercialization
opportunities with pharmaceutical, biotechnology, chemical and other life
sciences companies relating to proteomics and functional genomics. We structure
our current collaborations in a variety of ways. We obtain immediate funding in
the form of ongoing committed research and development payments and, in some
cases, technology access fees, from our collaborators. In some instances, we
also share in the long-term value of the products that we assist our
collaborators in developing through the retention of certain products rights and
from royalty fees from the sale of products developed using our technologies.
Several large pharmaceutical companies including Glaxo Wellcome PLC, Procter &
Gamble Co. and Novartis AG have collaborated with us on specific proteomics
projects in pharmaceutical research and development. Biotechnology companies,
such as Genentech, Inc., have also conducted research with us. We also have had
research programs with numerous government agencies. We currently have seven
ongoing research and technology development programs.
We established a three-year collaboration with Dow in September 1998 for its
exclusive use of our GENEWARE technology for functional genomics in selected
agricultural and industrial chemical categories. We and Dow have identified
commercially significant genes for specific agricultural and industrial uses
that will be marketed by Dow and its affiliates. We retain the right to use any
of the identified genes resulting from this collaboration for uses in other
categories not allocated to Dow. Dow can elect to continue this collaboration
beyond September 2001 by paying additional technology access fees. If Dow does
not elect to continue this collaboration, we will be able to market to others
access to our technology for agricultural and industrial chemical purposes.
During this collaboration, we have developed our plant gene discovery and
function process utilizing our proprietary technologies. In this collaboration
we are entitled to receive committed research and development funding, milestone
payments upon completion of milestones, annual technology access fees and
royalties from products Dow and its affiliates commercialize from the
collaboration.
INTELLECTUAL PROPERTY
We continually seek patent protection for our proteomic, genomic and
biomanufacturing technologies. As of March 15, 2000, we had 19 issued and 47
pending U.S. patents. Our issued U.S. patents expire between 2006 and 2018. As
of the same date,
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foreign patents corresponding to many of the U.S. patents and patent
applications have been filed and/or issued in one or more other countries,
resulting in a total of 12 issued and 44 pending foreign patents.
These issued patents are directed to various technological areas which we
believe are valuable to our business including:
- Proteomic analytical equipment and processes and generation of proteomic
databases
- Methods for purification of viruses and proteins
- Methods for high-throughput, large-scale discovery of genes and gene
function
- Plant and animal viral expression systems
We also rely upon copyright protection, trade secrets, know-how, continuing
technological innovation and licensing from others to protect our intellectual
property. Our success will depend, in part, on our ability to obtain patent
protection for our products and processes, to preserve our copyrights and trade
secrets, to operate without infringing the proprietary rights of third parties
and to acquire licenses, if needed, to support or enhance our intellectual
property portfolio.
Dow, through its wholly-owned subsidiary, Mycogen Corporation, owns or controls
patent rights in the field of viral vectors covering the infection of plants and
the expression of foreign genes in plants. Dow has informed us that it believes
some of our plant viral activities may fall within the scope of its patents. We
have informed Dow that we believe none of Dow's patent rights cover our plant
viral activities. Dow has expressed the desire to license these patents to us
and we are in discussions with Dow regarding such a license or the possibility
of cross-licensing the parties' respective intellectual property. We believe our
business relations with Dow remain positive.
EMPLOYEES
As of March 15, 2000, we had 118 full-time employees, 92 of whom comprise the
research staff and are engaged in research, development and scale-up activities.
The remainder work in general and administrative areas. Thirty-six employees
hold Ph.D. degrees. We consider relations with our employees to be good, and
none of the employees is covered by a collective bargaining agreement.
COMPETITION
The genomics and proteomics businesses are intensely competitive. The genomics
and proteomics industries are characterized by extensive research efforts,
resulting in rapid technological progress. Many universities, public agencies
and established pharmaceutical, biotechnology, chemical and other life sciences
companies with substantially greater resources than us are developing and using
technologies and are actively engaging in the development of products similar to
or competitive with our products and technologies.
The markets for protein development and production, including human and
veterinary vaccines like the ones we are developing, also are highly
competitive. Competitors with substantially greater resources than us are
actively developing products similar to or competitive with our products.
Several pharmaceutical, biotechnology, chemical and other life sciences
companies are engaged in research and development with respect to the use of
novel gene expression systems to produce therapeutic proteins. Other companies
are developing and marketing therapeutics for non-Hodgkins lymphoma.
In the field of functional genomics, we face competition from many biotechnology
companies. In the field of proteomics, we face competition from a small number
of companies using similar methods to investigate protein expression. The
maturation of the genomics industry, associated with the completion of the human
genome sequence, is likely to cause successful genomics companies with greater
resources than ours to look to proteomics as an opportunity for continued
growth.
We and others compete in the newly emerging fields of functional genomics and
proteomics on the basis of technological innovations which offer time and cost
advantages for the accomplishment of specific tasks, many of which were not
previously practical. We believe our proprietary ProGEx system and GENEWARE
technology, and our significant patent portfolio, will allow us to compete
effectively in these fields. However, new developments are expected to continue,
and discoveries by others may render our potential products and technologies
non-competitive.
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FACILITIES
Our principal research and development facilities and corporate headquarters are
located in Vacaville, California. The approximately 40,000 square-foot leased
facility includes administrative offices, a genetic engineering laboratory, a
plant discovery and function laboratory and a bioinformatics software
laboratory. Our pilot scale bioprocessing laboratory at this same facility is
physically designed for conversion to current good manufacturing practices and
good laboratory practices operating standards, and provides us with the
capability to conduct research, process development and scale-up from bench
through pilot scale within the same facility. We also own a facility of
approximately 22,000 square feet facility in Owensboro, Kentucky for extraction
and downstream bioprocessing. The Owensboro facility's pilot plant is in
operation at this time. Our subsidiary, Large Scale Proteomics, leases
approximately 7,500 square feet of laboratory and office facilities in
Rockville, Maryland.
LEGAL PROCEEDINGS
We have filed an opposition against the grant of a European patent filed by Axis
Genetics, Ltd., that is now believed to be owned or controlled by Dow. The
European Patent Office Opposition Division has issued a Preliminary Opinion
indicating that the claims in the patent are not patentable. The European Patent
Office has scheduled oral proceedings to take place and has invited the parties
to submit additional evidence prior to the oral proceedings. We have filed this
additional evidence and prepared for the oral proceedings. We expect the
European Patent Office to make a ruling on the patentability of the claims of
the patent during the oral proceedings. If we are not successful in these oral
proceedings or on appeal, and the claims in the patent are declared valid as
originally granted, such claims may be viewed by the owner of the patent as
covering some of our activities, if practiced in Europe. We believe that
corresponding issued patents in the United States do not cover our present or
planned activities. There can be no assurance that another corresponding U.S.
patent will not issue from a pending U.S. patent application that would include
claims corresponding to the European patent. If our opposition is unsuccessful,
there can be no assurance that we will be able to obtain a license or that we
will be successful in an infringement action brought by the patent owner in
individual countries where infringement actions may be brought against us.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products
The development, production and marketing of any pharmaceutical products
developed by us or our collaborators will be subject to extensive regulation by
United States and foreign governmental authorities. In the United States, new
drugs are subject to regulation under the Federal Food, Drug and Cosmetic Act
and biological products are subject to regulation both under certain provisions
of that Act and under the Public Health Services Act. The FDA regulates, among
other things, the development, testing, manufacturing, safety, efficacy, record
keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of new biologics and drugs. The process of obtaining FDA approval
has historically been costly and time-consuming.
The standard process required by the FDA before a pharmaceutical agent may be
marketed in the United States includes:
- preclinical studies;
- submission to the FDA of an Investigational New Drug application, or IND,
which must become effective before human clinical trials may commence;
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug or biologic in our intended application;
- for drugs, submission of a New Drug Application, or NDA, or a Biologic
License Application, or BLA, with the FDA; and
- FDA approval of the NDA or BLA prior to any commercial sale or shipment
of the drug.
In addition to obtaining FDA approval for each product, each drug manufacturing
establishment must be inspected and approved by the FDA. All manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with current GMP requirements.
The preclinical studies can take several years to complete, and there is no
guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they
generally take two to five years,
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but may take longer, to complete. After completion of clinical trials of a new
drug or biologic product, FDA marketing approval of the NDA or BLA must be
obtained. This process requires substantial time and effort and there is no
assurance that the FDA will accept the NDA or BLA for filing and, even if filed,
that approval will be granted. In the past, the FDA's approval of the NDA or BLA
has taken, on average, two to five years; if questions arise, approval can take
more than five years.
In addition to regulatory approvals that must be obtained in the United States,
a drug product is also subject to regulatory approval in other countries in
which it is marketed, although the requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. No action can be taken to market any drug product in a
country until an appropriate application has been approved by the regulatory
authorities in that country. FDA approval does not assure approval by other
regulatory authorities. The current approval process varies from country to
country, and the time spent in gaining approval varies from that required for
FDA approval. In some countries, the sale price of a drug product must also be
approved. The pricing review period often begins after market approval is
granted. Even if a foreign regulatory authority approves a drug product, it may
not approve satisfactory prices for the product.
Regulation of Genetically-Modified Food Products
The FDA extensively regulates manufacturing, labeling, distributing, marketing,
promotion and advertising after product approval. The FDA has announced that it
will apply the same regulatory standards to foods developed through genetic
modification as applied to foods developed through traditional agricultural
methods. Genetically modified food products therefore could be subject to FDA
pre-market review, and products we are developing with our collaborators, such
as Dow, may become subject to lengthy FDA reviews. If the FDA concludes that
these products are food additives, or raise safety questions, it may not approve
them in a timely manner, or at all. Any failure to obtain, or a significant
delay in obtaining, such approvals would adversely affect our ability or the
ability of our collaborators to market products successfully, thereby reducing
or eliminating product revenues or royalties to us. In addition, these products
may be subject to substantial review by foreign governmental regulatory
authorities that could prevent or delay approval in those countries.
Regulation by USDA
We must comply with USDA regulations for outdoor releases of genetically
engineered organisms as well as other products designed for use on or with
agricultural products. Recently, the USDA released new rules that prohibit the
inclusion of genetically modified ingredients in products labeled as organic.
The USDA rules also prohibit the use of genetically modified fibers in clothing
labeled as organic. These new rules could adversely affect products under
development with our collaborators, including Dow. In addition, the USDA
prohibits genetically modified plants from being grown and transported except
pursuant to an exemption, or under special permits. We may use genetically
modified plants as screening or production hosts. Changes in USDA policy
regarding the movement or field release of genetically modified plant hosts
could adversely affect our business.
Other Regulations
In addition to the foregoing, our business is and will be subject to regulation
under various state and federal environmental laws, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act. These and other laws govern our use handling and
disposal of various biological, chemical and radioactive substances used in, and
wastes generated by, our operations. We believe that we are in material
compliance with applicable environmental laws and that our continued compliance
with these laws will not have a material adverse effect on our business. We
cannot predict, however, whether new regulatory restrictions on the production,
handling and marketing of biotechnology products will be imposed by state or
federal regulators and agencies or whether existing laws and regulations will
not adversely affect us in the future.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SCIENTIFIC ADVISORS
The following table sets forth information regarding our executive officers,
directors and scientific advisors as of March 15, 2000:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AGE POSITION
---- --- --------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Robert L. Erwin(2)(3)(4)........................ 46 Chairman of the Board, Chief Executive Officer
and Director
David R. McGee, Ph.D. .......................... 50 Senior Vice President, Chief Operating Officer
and Assistant Secretary
Laurence K. Grill, Ph.D. ....................... 50 Senior Vice President, Research and Development
John S. Rakitan................................. 55 Senior Vice President, General Counsel and
Secretary
R. Barry Holtz, Ph.D. .......................... 53 Senior Vice President, Bioprocess Development
Daniel Tuse, Ph.D. ............................. 48 Vice President, Pharmaceutical Development
Michael D. Centron.............................. 44 Treasurer and Controller
N. Leigh Anderson, Ph.D. ....................... 50 Director
Marvyn Carton(1)................................ 82 Director
Bernard I. Grosser, M.D.(2)..................... 70 Director
Charles A. Hayes(1)(4).......................... 65 Director
Sol Levine(3)................................... 71 Director
John W. Maki(3)(4).............................. 39 Director
John J. O'Malley................................ 52 Director
James P. TenBroek(1)(2)......................... 39 Director
Robert J. Walden................................ 44 Director
Jacobo Zaidenweber, M.D. ....................... 70 Director
SCIENTIFIC ADVISORS
Ronald W. Davis, Ph.D. ......................... 58 Scientific Advisor
Edgar G. Engelman, M.D. ........................ 54 Scientific Advisor
Michael E. Selsted, M.D., Ph.D. ................ 49 Scientific Advisor
T. Michael Wilson, Ph.D. ....................... 49 Scientific Advisor
</TABLE>
- ---------------
(1) Member of audit committee
(2) Member of the compensation committee
(3) Member of the executive committee
(4) Member of the nominating committee
ROBERT L. ERWIN. Mr. Erwin co-founded Large Scale Biology in 1987 and has been
Chairman of the Board and Chief Executive Officer since 1992. From 1988 to 1992,
Mr. Erwin served as our President and Chief Executive Officer. As a co-founder
of Sungene Technologies Corporation, he served as Vice President of Research and
Product Development from 1981 through 1986. Mr. Erwin is the former chairman of
the State of California Breast Cancer Research Council and currently serves on
the University of California president's Engineering Advisory Council. He is
Chairman of the Supervisory Board of Icon Genetics, AG. Mr. Erwin has served on
the Biotechnology Industry Advisory Board for Iowa State University. Mr. Erwin
received his M.S. degree in genetics from Louisiana State University.
DAVID R. MCGEE, PH.D. Dr. McGee co-founded Large Scale Biology and has served as
Vice President since 1987, Assistant Secretary since 1991 and as Senior Vice
President and Chief Operating Officer since 1997. Prior to joining us, from 1983
to 1987, Dr. McGee was Vice President of Operations at Sungene Technologies
Corporation. Dr. McGee received his
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<PAGE> 39
Ph.D. in genetics from Louisiana State University and served as a faculty
instructor of zoology and genetics at Louisiana State University.
LAURENCE K. GRILL, PH.D. Dr. Grill co-founded Large Scale Biology and has served
as Large Scale Biology's Vice President, Research and Development since 1987 and
as Senior Vice President since 1999. Dr. Grill was employed as the Manager of
Plant Molecular Biology for Sandoz Crop Protection Corporation from 1984 to 1987
and Senior Research Scientist in the Department of Molecular Biology at Zoecon
Research Institute from 1980 to 1984. He received his Ph.D. in plant pathology
from the University of California at Riverside.
JOHN S. RAKITAN. Mr. Rakitan joined Large Scale Biology in 1987 as the
controller. From 1988 to 1990, he served as treasurer. Mr. Rakitan was appointed
Vice President, General Counsel and Assistant Secretary in 1988, Secretary in
1991 and Senior Vice President in 1999. Prior to joining us, Mr. Rakitan was an
attorney in private practice. Mr. Rakitan received his J.D. degree from the
University of Notre Dame.
R. BARRY HOLTZ, PH.D. Dr. Holtz joined Large Scale Biology in 1989 as a Vice
President of Bioprocess Development. Dr. Holtz has served as Large Scale
Biology's Vice President, Bioprocess Development since 1989, and as Senior Vice
President since 1999. From 1981 to 1989, Dr. Holtz was President of Holtz
Bioengineering, Inc. Dr. Holtz received his Ph.D. in biochemistry from
Pennsylvania State University and served as Assistant Professor in the
Department of Food Science and Nutrition at Ohio State University.
DANIEL TUSE, PH.D. Dr. Tuse joined Large Scale Biology as Vice President,
Pharmaceutical Development in 1995. Prior to joining Large Scale Biology, Dr.
Tuse was Assistant Director of the Life Sciences Division of SRI International.
Dr. Tuse received his Ph.D. in Microbiology from the University of California,
Davis.
MICHAEL D. CENTRON. Mr. Centron joined Large Scale Biology as the controller in
1988. He has served as Large Scale Biology's treasurer since 1991. Prior to
joining us, Mr. Centron was Audit Supervisor for Varian Associates from 1985
through 1988. Mr. Centron also worked for Arthur Young and Co., currently Ernst
& Young. Mr. Centron is a certified public accountant and received his B.S. in
economics from the Wharton School at University of Pennsylvania and his M.B.A.
degree from the University of California at Berkeley.
N. LEIGH ANDERSON, PH.D. Dr. Anderson was elected to the board of directors of
Large Scale Biology in September 1999. Dr. Anderson serves as President and
Chief Executive Officer of Large Scale Proteomics Corporation, a company he
co-founded in 1985. Dr. Anderson obtained his B.A. in Physics with honors from
Yale and a Ph.D. in Molecular Biology from Cambridge University (England).
MARVYN CARTON. Mr. Carton was elected to the board of directors of Large Scale
Biology from 1988 to 1990 and currently since October 1998. Mr. Carton is a
former Executive Vice President and Director with the investment-banking firm of
Allen & Company. Mr. Carton received his B.A. from Brown University and his
M.B.A. from New York University.
BERNARD I. GROSSER, M.D. Dr. Grosser was elected to the board of directors of
Large Scale Biology in 1996. Dr. Grosser is Chairman, Department of Psychiatry,
University of Utah, and he also serves as a director of Human Pheromone
Sciences, Inc. Dr. Grosser received his B.A. from the University of
Massachusetts, his M.S. in Zoology from the University of Michigan and his M.D.
from Case Western Reserve University.
CHARLES A. HAYES. Mr. Hayes was elected to the board of directors of Large Scale
Biology in 1990. Mr. Hayes is Chairman and Chief Executive Officer of Guilford
Mills in Greensboro, North Carolina. Mr. Hayes has served as a director of U.S.
Trust, North Carolina, and is a director of Piedmont Associated Industries and
the Knitted Textile Association.
SOL LEVINE. Mr. Levine was elected to the board of directors of Large Scale
Biology in 1992. Mr. Levine is a director of Wesley Jessen VisionCare, Inc. Mr.
Levine is a member of Technology Directors II, LLC and Technology Directors II
BST, LLC. Mr. Levine is the former President of Revlon, Inc.
JOHN W. MAKI. Mr. Maki was elected to the board of directors of Large Scale
Biology in May 1997. In November 1999, Mr. Maki became a Managing Director of
Audax Management Company New Jersey LLC, a division of Audax Group LLC. From
1998 through 1999 Mr. Maki was a Managing Director of Technology Directors, Inc.
and also served as a Managing Director of Technology Directors II LLC from 1997
through 1998. He was a Principal at Bain Capital, Inc. from 1993 to 1997. Mr.
Maki is also a member of the Supervisory Board of Icon Genetics, AG, and a
director of Wesley Jessen VisionCare, Inc.
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<PAGE> 40
and is a member of Technology Directors II, LLC and Technology Directors II BST,
LLC. Mr. Maki received his B.A. in economics from Harvard College.
JOHN J. O'MALLEY. Mr. O'Malley was elected to the board of directors of Large
Scale Biology in May 1997. In November 1999, Mr. O'Malley became a Managing
Director of Audax Management LLC, a division of Audax Group LLC. From April
through November 1999, Mr. O'Malley served as Managing Director of Technology
Directors, Inc. From 1994 to 1999 he was Executive Vice President of Bain
Capital, Inc. He is a director of Wesley Jessen VisionCare, Inc. and is a member
of Technology Directors II, LLC and Technology Directors II BST, LLC. Mr.
O'Malley received his A.B. in Economics from Middlebury College and his M.B.A.
from the Wharton School of the University of Pennsylvania.
JAMES P. TENBROEK. Mr. TenBroek was elected director of Large Scale Biology in
May 1997. Mr. TenBroek has been a Managing Director with Wind Point Partners
III, LP since 1997, Wind Point Partners IV, LP since 1998 and was an investment
professional with Golder, Thoma, Cressey, Rauner, Inc. from 1994 to September,
1997. Mr. TenBroek is the managing member of Technology Directors BST II, LLC
and a member of Technology Directors II, LLC. Mr. TenBroek received his A.B. in
Engineering from Dartmouth College, his M.S. in electrical engineering from
Cornell University and his MBA from Harvard Business School.
ROBERT J. WALDEN. Mr. Walden was elected director of Large Scale Biology in May
1999. Mr. Walden has served as Vice President, Finance, at Large Scale
Proteomics Corporation since 1997. Mr. Walden previously served as Vice
President of Finance and Administration at Osiris Therapeutics, Inc. and as
Chief Financial Officer at the American Type Culture Collection. Mr. Walden
received his degree in Finance from the University of Maryland.
JACOBO ZAIDENWEBER, M.D. Dr. Zaidenweber was elected director of Large Scale
Biology in 1987. Dr. Zaidenweber is Chairman of the Board of American Textiles
Corporation. He has served as the Coordinator for the Private Sector for the
North American Free Trade Agreement in the Section of Textiles and Tariffs. He
is the former President of the Coordinating Committee of the United
States-Mexico Chamber of Commerce. Dr. Zaidenweber received his medical degree
from the University of Mexico.
SCIENTIFIC ADVISORS
We have consulting arrangements with scientists who serve as our advisors. Our
advisors were chosen for their expertise in fields that are important to the
research and development of our products. We generally compensate our scientific
advisors for their services with a combination of cash payments and stock
options. We are supporting research projects in the laboratories of some of our
scientific advisors and we intend to continue such collaborations. Some, but not
all, of the scientific advisors participating in these collaborations are
compensated for their services to us.
Our scientific advisors presently include the following persons:
RONALD W. DAVIS, PH.D. Dr. Davis is a professor in the Department of
Biochemistry at Stanford University School of Medicine. He acts as a scientific
advisor in the field of functional genomics.
EDGAR G. ENGLEMAN, M.D. Dr. Engleman is a professor of Pathology and Medicine at
the Stanford University Medical School Blood Center. He acts as a scientific
advisor in the field of medicine.
MICHAEL E. SELSTED, PH.D., M.D. Dr. Selsted is a professor of Pathology, College
of Medicine, University of California, Irvine, Pathology and Infectious Disease.
Dr. Selsted acts as an advisor in the field of host defense mechanisms and
molecular biology.
T. MICHAEL A. WILSON, PH.D. Dr. Wilson is Chief Executive Officer of
Horticultural Research International, a government institute in Wellesbourne,
United Kingdom. Formerly he was a professor at Rutgers University. Dr. Wilson
acts as an advisor in the field of virology.
We also retain other consultants and business and technical advisors that we
believe have the potential to strengthen our competitive position.
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<PAGE> 41
BOARD OF DIRECTORS
Our bylaws currently provide for a board of directors consisting of eleven
directors. Each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his or
her successor is duly elected and qualified. The executive officers serve at the
discretion of the board of directors.
Board Committees
We have established an audit committee composed of independent directors that
reviews and supervises our financial controls, including the selection of our
auditors, reviews our books and accounts, meets with our officers regarding our
financial controls, acts upon recommendations of our auditors and takes further
actions as the audit committee deems necessary to complete an audit of our books
and accounts, as well as other matters that may come before it or as directed by
the board. The audit committee currently consists of three directors: Messrs.
Carton, Hayes and TenBroek.
We have established an executive committee to act on an interim basis between
meetings of the full Board of Directors with all of the authority and power of
the full Board of Directors in the management of our business and affairs,
except as otherwise limited by our by-laws. The Executive Committee currently
consists of three directors: Messrs. Erwin, Levine and Maki.
We have established a nominating committee to recommend to the Board of
Directors individuals for appointment or election as directors of the company.
The nominating committee currently consists of three directors: Messrs. Erwin,
Hayes and Maki.
We have also established a compensation committee that reviews and approves the
compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time to time be determined by the
board. The compensation committee currently consists of three directors: Messrs.
Erwin, Grosser and TenBroek.
Director Compensation
Directors who are not our employees have not been paid any cash compensation but
do receive stock options and reimbursement of out-of-pocket travel expenses for
attendance at meetings of the board of directors. In 1999, we granted options to
purchase 15,000 shares at an exercise price of $11.25 per share to Messrs.
Carton, Hayes, Levine, Maki, O'Malley, TenBroek and Drs. Grosser and
Zaidenweber. In 1989, we granted Mr. Carton options to purchase 10,000 shares at
an exercise price of $3.50 per share, and in 1995, we granted Mr. Hayes options
to purchase 9,000 shares at an exercise price of $12.62 per share. Additionally,
in 1995, we granted Mr. Levine options to purchase 25,000 shares at $12.62 per
share and in 1992-93 granted him 125,000 options at $3.50 per share. Directors
who are also our employees do not receive additional compensation for serving as
directors.
COMPENSATION COMMITTEE INTERLOCKS
None of our compensation committee members is an employee of or ever was an
employee of Large Scale Biology, other than Mr. Erwin, our Chairman of the Board
and Chief Executive Officer. Mr. TenBroek, who serves on our compensation
committee, is affiliated with two of our significant stockholders. See
"Transactions and Relationships with Related Parties." None of our executive
officers serves on the board of directors or compensation committee of any other
company that has one or more executive officers serving as a member of our board
or our compensation committee.
EXECUTIVE OFFICERS
Our executive officers are appointed by and serve at the discretion of our board
of directors. There are no family relationships among any of our directors or
executive officers.
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<PAGE> 42
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning compensation in 1999 of
our chief executive officer and our four other most highly compensated executive
officers.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
FISCAL ------------------------------- ----------------------
YEAR SECURITIES
NAME AND PRINCIPAL POSITION ENDED SALARY($) BONUS($) OTHER($) UNDERLYING OPTIONS(#)
--------------------------- ------ --------- -------- -------- ----------------------
<S> <C> <C> <C> <C> <C>
Robert L. Erwin.................................... 1999 184,000 12,000 -- 100,000
Chairman of the Board and Chief Executive Officer
N. Leigh Anderson, Ph.D............................ 1999 174,000 12,000 29,000(2) 50,000
President and Chief Executive Officer, Large
Scale Proteomics
Laurence K. Grill, Ph.D............................ 1999 147,000 12,000 -- 50,000
Senior Vice President, Research
R. Barry Holtz, Ph.D............................... 1999 147,000 12,000 -- 50,000
Senior Vice President, Bioprocess Development
David R. McGee, Ph.D............................... 1999 165,000 12,000 -- 50,000
Senior Vice President and Chief Operating Officer
</TABLE>
- ---------------
(1) Excludes other compensation in the form of perquisites and other personal
benefits that constitute the lesser of $50,000 or 10% of the total annual
salary or bonus in 1999.
(2) Represents payments of deferred compensation accrued prior to our
acquisition of Large Scale Proteomics.
Option Grants in Fiscal 1999
The following table sets forth information with respect to stock options granted
to our chief executive officer and our four other most highly compensated
executive officers. Amounts in the following table represent hypothetical gains
that could be achieved for the respective options if exercised at the end of the
option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the SEC and do not represent an
estimate or projection of our future common stock prices. The amounts represent
assumed rates of appreciation in the value of our common stock from the fair
market value on the date of grant. Actual gains, if any, on stock options
exercises are dependent on future performance of our common stock and overall
stock market conditions. The amounts reflected in the following table may not
necessarily be achieved.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SHARES OF VALUE AT ASSUMED ANNUAL
COMMON PERCENT OF RATES OF STOCK PRICE
STOCK TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED 1999 PRICE ($) DATE 5%($) 10%($)
---- ----------- ------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Erwin............................ 100,000 6.3% 11.25 12/30/09 707,506 1,792,960
N. Leigh Anderson, Ph.D.................... 50,000 3.2% 11.25 12/30/09 353,753 896,480
Laurence K. Grill, Ph.D.................... 50,000 3.2% 11.25 12/30/09 353,753 896,480
R. Barry Holtz, Ph.D....................... 50,000 3.2% 11.25 12/30/09 353,753 896,480
David R. McGee, Ph.D....................... 50,000 3.2% 11.25 12/30/09 353,753 896,480
</TABLE>
In 1999, we granted options to purchase an aggregate of 1,585,375 shares to
employees, directors and consultants under our 1990, 1992 and 1999 stock option
plans at an exercise price determined in good faith by our Board of Directors.
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<PAGE> 43
Aggregated Option Exercises in 1999 and Fiscal Year End Option Values
The following table sets forth information with respect to option exercises in
1999 and the value of options at December 31, 1999 for our chief executive
officer and our four other most highly compensated executive officers. The value
of unexercised "in-the-money" options at December 31, 1999 is based upon a
valuation by our board of directors of our common stock at $10.00 per share.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AND WARRANTS AT IN-THE-MONEY OPTIONS AT
COMMON STOCK DECEMBER 31, 1999 DECEMBER 31, 1999($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Erwin................... -- -- -- 100,000 -- --
N. Leigh Anderson, Ph.D. ......... -- -- -- 50,000 -- --
Laurence K. Grill, Ph.D. ......... 2,000 13,000 13,000 50,000 85,000 --
R. Barry Holtz, Ph.D. ............ 6,744 47,000 15,000 50,000 98,000 --
David R. McGee, Ph.D. ............ -- -- 15,000 50,000 98,000 --
</TABLE>
BENEFIT PLANS
2000 Stock Incentive Plan
Introduction. Our 2000 stock incentive plan is intended to serve as the
successor program to our 1999 stock option plan. The 2000 plan will be adopted
by our Board and approved by our stockholders prior to the completion of this
offering. The 2000 plan will become effective when the underwriting agreement
for this offering is signed. At that time, all outstanding options under our
1999 plan, including options granted under our 1988, 1990 and 1992 stock plans
which were incorporated into our 1999 stock option plan, will be transferred to
the 2000 plan, and no further option grants will be made under the prior plan.
The transferred options will continue to be governed by their existing terms,
unless our compensation committee decides to extend one or more features of the
2000 plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as will be in effect for grants made
under the discretionary option grant program of our 2000 plan.
Share Reserve. shares of our common stock have been authorized
for issuance under the 2000 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1999 plan plus an additional
increase of shares. The share reserve under our 2000 plan will
automatically increase on the first trading day in January each calendar year
from 2001 through 2005, by an amount equal to 3% of the total number of shares
of our common stock outstanding on the last trading day of December in the prior
year, but in no event will this annual increase exceed shares. In
addition, no participant in our 2000 plan may be granted stock options or direct
stock issuances for more than 1,000,000 shares of common stock per calendar
year.
Programs. Our 2000 plan has five separate programs:
- the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;
- the stock issuance program, under which eligible individuals may be
issued shares of our common stock directly through the purchase of such
shares at a price not less than their fair market value at the time of
issuance or as a bonus tied to the attainment of performance milestones
or the completion of a specified period of service;
- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition of
special below market stock option grants;
- the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
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<PAGE> 44
- the director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of any retainer
fee otherwise payable to them in cash for the year to the acquisition of
special below-market option grants.
Eligibility. The individuals eligible to participate in our 2000 plan include
our officers and other employees, our board members and any consultants that we
hire.
Administration. The discretionary option grant and stock issuance programs will
be administered by our compensation committee. This committee will determine
which eligible individuals are to receive option grants or stock issuances under
those programs, the time or times when the grants or issuances are to be made,
the number of shares subject to each grant or issuance, the status of any
granted option as either an incentive stock option or a nonstatutory stock
option under the federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. The compensation committee will also have the
authority to select the executive officers and other highly compensated
employees who may participate in the salary investment option grant program if
that program is put into effect for one or more calendar years.
Plan Features. Our 2000 plan will include the following features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee. In addition, the plan
administrator may provide financial assistance to one or more optionees
in the exercise of their outstanding options or the purchase of their
unvested shares by allowing such individuals to deliver a full-recourse,
interest-bearing promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1999 plan, in return for the grant of new
options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election to
surrender their outstanding options for a payment from us equal to the
fair market value of the shares subject to the surrendered options less
the exercise price payable for those shares. We may make the payment in
cash or in shares of our common stock. None of the options under our
1988, 1990, 1992 and 1999 plans have any stock appreciation rights.
Change in Control. The 2000 plan will include the following change in control
provisions that may result in the accelerated vesting of outstanding option
grants and stock issuances:
- If we are acquired by merger or asset sale, each outstanding option under
the discretionary option grant program that is not to be assumed by the
successor corporation will immediately become exercisable for all the
option shares, and all outstanding unvested shares will immediately vest,
except to the extent our repurchase rights with respect to those shares
are to be assigned to the successor corporation;
- The compensation committee will have complete discretion to grant one or
more options that will become exercisable for all the option shares if
those options are assumed in the acquisition but the optionee's service
with us or the acquiring entity is subsequently terminated. The vesting
of any outstanding shares under our 2000 plan may be accelerated upon
similar terms and conditions.
- The compensation committee will also have the authority to grant options
which will immediately vest in the event we are acquired, whether or not
those options are assumed by the successor corporation.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will vest in connection with a successful tender offer for more than
fifty percent of our outstanding voting stock or a change in the majority
of our board through one or more contested elections. Such accelerated
vesting may occur either at the time of such transaction or upon the
subsequent termination of the individual's service.
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<PAGE> 45
- The options currently outstanding under our 1988, 1990, 1992 and 1999
plans will immediately vest if we are acquired by a merger or asset sale
and the acquiring company does not assume those options. Certain of those
options, however, contain an additional vesting acceleration feature that
will result in the immediate vesting of all or part of those options upon
an involuntary termination of the optionee's employment within 18 months
following an acquisition in which those options are assumed.
Salary Investment Option Grant Program. If the compensation committee decides to
put this program into effect for one or more calendar years, each executive
officer or other highly compensated employee selected for participation in the
program may elect to reduce his or her base salary for the calendar year by an
amount not less than $10,000 nor more than $50,000. Each selected individual who
makes such an election will automatically be granted, on the first trading day
in January of the calendar year for which his or her salary reduction is to be
in effect, an option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option will
have an exercise price per share equal to one-third of the fair market value of
the option shares on the grant date. As a result, the option will be structured
so that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the amount by which the
optionee's salary is reduced under the program. The option will become
exercisable in a series of 12 equal monthly installments during the calendar
year for which the salary reduction is to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-employee
board member at any time after the effective date of this offering will receive
an option grant for 10,000 shares of common stock on the date such individual
joins the board. In addition, on the date of each annual stockholders' meeting
held after the effective date of this offering, each non-employee board member
who is to continue to serve as a non-employee board member, including each of
our current non-employee board members, will automatically be granted an option
to purchase 2,500 shares of common stock, provided such individual has served on
the board for at least six months.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option that are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
10,000-share automatic option grant will vest in a series of four successive
annual installments upon the optionee's completion of each year of board service
over the four year period measured from the grant date. The shares subject to
each annual 2,500-share automatic option grant will vest upon the optionee's
completion of one year of board service measured from the grant date. However,
the shares will immediately vest in full upon certain changes in control or
ownership or upon the optionee's death or disability while a board member.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a portion
of any cash retainer fee for the year to the acquisition of a below-market
option grant. The option grant will automatically be made on the first trading
day in January in the year for which the retainer fee would otherwise be payable
in cash. The option will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date, and the number of
shares subject to the option will be determined by dividing the amount of the
retainer fee applied to the program by two-thirds of the fair market value per
share of our common stock on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant date
less the exercise price payable for those shares will be equal to the portion of
the retainer fee applied to that option. The option will become exercisable in a
series of 12 equal monthly installments during the calendar year for which the
retainer fee election is in effect. However, the option will become immediately
exercisable for all the option shares upon the death or disability of the
optionee while serving as a board member.
Additional Program Features. Our 2000 plan will also have the following
features:
- Outstanding options under the salary investment, automatic option grant
and director fee option grant programs will immediately vest if we are
acquired by a merger or asset sale or if there is a successful tender
offer for more than 50% of our outstanding voting stock or a change in
the majority of our board through one or more contested elections.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
41
<PAGE> 46
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that tender
offer.
- The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later than
2010.
Employee Stock Purchase Plan
Our employee stock purchase plan will be adopted by our Board of Directors and
approved by our stockholders prior to the completion of this offering. The plan
will become effective immediately upon the signing of the underwriting agreement
for this offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
We have 500,000 shares of our common stock that will initially be reserved for
issuance under the plan. The reserve will automatically increase on the first
trading day in January of each calendar year, beginning in calendar year 2001,
by an amount equal to 1% of the total number of shares of our common stock
outstanding on the last trading day of the immediately preceding calendar year.
In no event will any annual increase exceed shares.
The plan will have a series of successive overlapping offering periods, with a
new offering period beginning on the first business day of May and November each
year. Each offering period will continue for a period of 24 months, unless
otherwise determined by our compensation committee. However, the initial
offering period will start on the date the underwriting agreement for this
offering is signed and will end on the last business day of April 2002. The next
offering period will start on the first business day of November 2000 and end on
the last business day of October 2002.
Employees scheduled to work more than 20 hours per week for more than five
calendar months per year may participate in the plan and may join an offering
period on the start date of that period. Employees may participate in only one
offering period at any time.
A participant may contribute up to 15% of his or her cash earnings through
payroll deductions, and the accumulated deductions will be applied to the
purchase of shares on each semi-annual purchase date. Semi-annual purchase dates
will occur on the last business day of April and October each year, with the
first purchase to occur on the last business day of October 2000. The purchase
price per share on each semi-annual purchase date will be equal to 85% of the
fair market value per share on the start date of the offering period or, if
lower, 85% of the fair market value per share on the semi-annual purchase date.
However, a participant may not purchase more than 2,500 shares on any purchase
date, and not more than 125,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
If the fair market value per share of our common stock on any purchase date is
less than the fair market value per share on the start date of the 24-month
offering period, then that offering period will automatically terminate, and all
participants in the terminated offering period will automatically be transferred
to the new offering period commencing immediately thereafter.
Should we be acquired by merger or sale of substantially all of our assets or
more than 50% of our voting securities, then all outstanding purchase rights
will automatically be exercised immediately prior to the effective date of the
acquisition. The purchase price in effect for each participant will be equal to
85% of the market value per share on the start date of the offering period in
which the participant is enrolled at the time the acquisition occurs or, if
lower, 85% of the fair market value per share immediately prior to the
acquisition.
The following provisions will also be in effect under the plan:
- The plan will terminate no later than the last business day of April
2010.
- The board may at any time amend, suspend or discontinue the plan.
However, some amendments may require stockholder approval.
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<PAGE> 47
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND
CHANGE IN CONTROL ARRANGEMENTS
We have entered into employee agreements as part of the acquisition of our
subsidiary, Large Scale Proteomics, with two of the founders of that company:
Dr. N. Leigh Anderson, who is one of our directors, and Dr. Norman Anderson, who
is the Chief Scientist of Large Scale Proteomics and Dr. N. Leigh Anderson's
father. The agreements provide for base salaries of $185,000 and participation
in employee benefits provided to other salaried employees. Each agreement
provides for non-competition with Large Scale Proteomics over the five-year term
of the agreement. In the event Dr. N. Leigh Anderson's employment is terminated
without cause or on other specific conditions, he would have a license for
non-competitive applications of the technology of Large Scale Proteomics owned
prior to our acquisition of Large Scale Proteomics. In lieu of a similar license
to use Large Scale Proteomics pre-existing technology, Dr. Norman Anderson
received a cash settlement of $20,833 per month payable over two years.
We have also entered into a License and Consulting Agreement with Dr. Norman
Anderson covering biochip technology developed by Dr. Norman Anderson. The
agreement provides for a $4,000 per month consulting fee over two years and
license fee of $6,667 per month over five years. The license is a worldwide,
exclusive, non-royalty bearing license to certain biochip technology.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation eliminates to the maximum extent allowed by the
Delaware General Corporation Law, directors' personal liability to us or our
stockholders for monetary damages for breaches of fiduciary duties. Our
certificate of incorporation does not, however, eliminate or limit the personal
liability of a director for the following:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and executive officers
to the fullest extent permitted under the Delaware General Corporation Law and
may indemnify our other officers, employees and other agents as set forth in the
Delaware General Corporation Law. In addition, we have entered into an
indemnification agreement with each of our directors and executive officers. The
indemnification agreements contain provisions that require us, among other
things, to indemnify our directors and executive officers against liabilities,
other than liabilities arising from intentional or knowing and culpable
violations of law, that may arise by reason of their status or service as our as
directors or executive officers of Large Scale Biology or other entities to
which they provide service at our request and to advance expenses they may incur
as a result of any proceeding against them as to which they could be
indemnified. We believe that these bylaw provisions and indemnification
agreements are necessary to attract and retain qualified directors and officers.
Prior to the consummation of this offering, we will obtain an insurance policy
covering directors and officers for claims they may otherwise be required to pay
or for which we are required to indemnify them.
At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted, and we are not aware of any threatened litigation or proceeding
that may result in a claim for indemnification.
43
<PAGE> 48
TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
SALES OF SECURITIES
In January 1999, in connection with the acquisition of our subsidiary, Large
Scale Proteomics, we issued 2,287,634 shares of our Series G convertible
preferred stock in exchange for 92.5% of the outstanding shares of Large Scale
Proteomics' capital stock. In March 2000, we purchased the remaining 7.5% of its
capital stock for aggregate purchase price of approximately $74,000. The Series
G convertible preferred stock agreement contains a put option which gives Series
G convertible preferred stockholders the option to require Large Scale Biology
to purchase their shares at a price of $10 per share upon the occurrence of
certain events. This option terminates on the date of the final prospectus for
this offering. Prior to our purchase of Large Scale Proteomics, Drs. N. Leigh
Anderson and Norman Anderson owned 43% of the equity securities of that company.
Dr. N. Leigh Anderson received 830,965 shares and Dr. Norman Anderson received
224,290 shares of our Series G convertible preferred stock.
In March and April 1998, we issued and sold 1,000,000 shares of our Series F
convertible preferred stock at a price of $7.00 per share to a group of private
investors that included the following directors, executive officers and 5%
stockholders:
<TABLE>
<CAPTION>
---------------------------
SHARES OF SERIES F
PURCHASER CONVERTIBLE PREFERRED STOCK
--------- ---------------------------
<S> <C>
Marvyn Carton............................................... 37,857
Technology Directors II BST, LLC(1)......................... 759,404
</TABLE>
- -------------------------
(1) Four of our directors, Sol Levine, John W. Maki, John J. O'Malley and James
P. TenBroek, are members of Technology Directors II BST, LLC.
Pursuant to a purchase agreement dated May 14, 1997, Technology Directors II,
LLC, a greater than 5% stockholder, purchased all 2,536,260 shares of our common
stock held by a third-party investor from the investor at a price as agreed by
the parties.
Holders of shares of our preferred stock and our common stock issued or issuable
upon conversion thereof and some holders of our common stock are entitled to
registration rights. See "Description of Capital Stock -- Registration Rights."
AGREEMENT WITH DOW
In September 1998, we entered into a three year collaboration and license
agreement with Dow. The Dow agreement provides funding for sponsored genomics
research, royalties upon sales by Dow of products that result from this
collaboration and payments when specific milestones are reached. In connection
with the Dow agreement, we issued to Dow a warrant to purchase up to 1,232,061
shares of our common stock at an exercise price of $10.00 per share, subject to
increases over time to up to $15.21 per share. As of December 31, 1999,
1,232,061 shares of common stock were issuable under the warrant at $13.23 a
share. The warrant exercise price increases to $15.21 on September 1, 2000. The
warrant expires upon the earlier of August 31, 2003 or two years after
termination of the Dow agreement. The revenues we recognized under the Dow
agreement in 1998 were $2.9 million and in 1999 were $14.2 million.
AGREEMENTS WITH OFFICERS AND DIRECTORS
We have entered into employment arrangements with our executive officers. See
"Management -- Employment Contracts, Termination of Employment Arrangements and
Change in Control Arrangements."
We have granted options and issued common stock to our executive officers and
directors. See "Management -- Board of Directors -- Director Compensation,"
"-- Benefit Plans" and "Principal Stockholders."
We have entered into an indemnification agreement with each of our executive
officers and directors. See "Management -- Limitation of Liability and
Indemnification."
We have entered into non-competition and confidentiality agreements with one of
our directors, Dr. N. Leigh Anderson, and with Dr. Norman Anderson, who is the
Chief Scientist of Large Scale Proteomics and Dr. N. Leigh Anderson's father.
44
<PAGE> 49
In 1998 we entered into a consulting and business development arrangement with
Technology Directors, Inc., an affiliate of Technology Directors II, LLC and
Technology Directors II BST, LLC, which each own more than 5% of our stock.
Under the agreement, Technology Directors, Inc. is entitled to receive a fee of
up to approximately $800,000 depending on payments made in connection with the
Dow agreement. At the time of the agreement, two of our directors, Messrs. Maki
and O'Malley, were managing directors of Technology Directors, Inc. and Messrs.
Levine, Maki, O'Malley and TenBroek are members of the affiliated entities,
Technology Directors II, LLC and Technology Directors II BST, LLC. Under this
agreement, we paid $285,000 in 1999 and $219,000 in 1998. Further, in 1998 we
entered into a consulting agreement with Technology Directors, Inc. for
consulting services to be provided by Mr. Maki, one of our directors, and, in
1999, the agreement was expanded to include Mr. O'Malley, another of our
directors, under this agreement. Technology Directors, Inc. received an
additional $333,000 in 1999 and $83,000 in 1998, as well as expense
reimbursements of $26,000 in 1999.
In March 1997, we entered into a research and development program with Wesley
Jessen Corporation for development of novel anti-infective products for certain
ophthalmic applications. Three of our directors, Messrs. Maki, O'Malley, and
Levine, are directors of Wesley Jessen Corporation. In connection with this
program, we received payments of $525,000 in 1997 and $125,000 in 1998.
In 1999, we entered into a license agreement with Icon Genetics, AG, and the
International Institute of Cell Biology, National Academy of Sciences of
Ukraine. Robert L. Erwin, our Chief Executive Officer and Chairman of the Board,
serves as Chairman of the Supervisory Board of Icon Genetics. Mr. John Maki, one
of our directors, is a member of the Supervisory Board and a principal
shareholder of Icon Genetics AG. The license provides us an exclusive,
worldwide, fully paid-up license to specified technology for a license fee
payable in eight quarterly installments of $37,500. An additional $200,000 is
payable upon achievement of specified milestones. We were also granted a
worldwide, non-exclusive license to additional technology, subject to a 2%
royalty on net sales of products developed with such technology. Under the
agreement, we paid $213,000 in 1999 to Icon Genetics and the International
Institute of Cell Biology.
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been otherwise obtained from unaffiliated
third parties. All future transactions, including loans, if any, between us and
our officers, directors and principal stockholders and their affiliates and any
transactions between us and any entity with which our officers, directors or
five percent stockholders are affiliated will be approved by a majority of the
board of directors, including a majority of the independent and disinterested
outside directors of the board of directors and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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<PAGE> 50
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of our
common stock as of March 15, 2000, by the following individuals or groups:
- Each person or entity who is known by us to own beneficially greater than
5% of our outstanding stock
- Our chief executive officer and our four other most highly compensated
executive officers
- Each of our directors and
- All directors and executive officers as a group.
Each stockholder's percentage ownership in the following table is based on
11,884,051 shares of common stock outstanding as of March 15, 2000, as adjusted
to assume the conversion of all outstanding shares of our convertible preferred
stock into our common stock. For purposes of calculating each stockholder's
percentage ownership, any shares of common stock as to which the stockholder has
sole or shared voting power and any options or warrants exercisable within 60
days after March 15, 2000 held by a stockholder listed in the table below are
treated as outstanding shares.
Unless otherwise indicated, the principal address of each of the stockholders
below is c/o Large Scale Biology Corporation, 3333 Vaca Valley Parkway, Suite
1000, Vacaville, California 95688. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table below have
sole voting and investment power with respect to all shares of common stock held
by them.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF SHARES BENEFICIALLY OWNED
NAME AND ADDRESS OF NUMBER OF SHARES ---------------------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED PRIOR TO THIS OFFERING AFTER THIS OFFERING
------------------- ------------------ ---------------------- -------------------
<S> <C> <C> <C>
The Dow Chemical Company........................... 1,232,061(1) 10.4%
2030 Dow Center
Midland, MI 48674
Technology Directors II, LLC....................... 2,536,260 21.3%
460 Bloomfield Ave., Ste. 200
Montclair, NJ 07042
Technology Directors II BST, LLC................... 759,404 6.4%
460 Bloomfield Ave., Ste. 200
Montclair, NJ 07042
N. Leigh Anderson, Ph.D.(2)........................ 832,215 7.0%
9620 Medical Center Drive
Rockville, MD 20850
Robert L. Erwin(3)................................. 417,342 3.5%
Marvyn Carton(4)................................... 131,671 1.1%
Bernard I. Grosser, M.D.(5)........................ 72,280 *
Charles Hayes(6)................................... 66,789 *
Sol Levine(7)...................................... 251,465 2.1%
John W. Maki(8).................................... 3,296,914 27.7%
John J. O'Malley(9)................................ 3,296,914 27.7%
James P. TenBroek(10).............................. 3,305,914 27.8%
Robert J. Walden(11)............................... 107,614 *
Jacobo Zaidenweber, M.D.(12)....................... 465,001 3.9%
Laurence K. Grill, Ph.D.(13)....................... 198,270 1.7%
R. Barry Holtz, Ph.D.(14).......................... 30,163 *
David R. McGee, Ph.D.(15).......................... 202,250 1.7%
Directors and officers as a group (17 persons)..... 6,397,676 53.8%
</TABLE>
- ---------------
* Less than one percent.
(1) At March 15, 2000, in connection with the Dow agreement, The Dow Chemical
Company beneficially owned a warrant to purchase 1,232,061 shares of our
common stock. This warrant expires on the earlier of August 31, 2003 or two
years after the termination of the Dow agreement.
46
<PAGE> 51
(2) Includes 664,772 shares of Series G convertible preferred stock owned by
Dr. Anderson, 166,193 shares of Series G convertible preferred stock owned
by Dr. Anderson's wife, with respect to which Dr. Anderson may be deemed to
be a beneficial owner, and shares issuable upon exercise of an option to
purchase 1,250 shares of common stock.
(3) Includes 413,067 shares of common stock, 2,857 shares of Series C
convertible preferred stock convertible into 3,025 shares of common stock,
and shares issuable upon exercise of an option to purchase 1,250 shares of
common stock.
(4) Includes 65,000 shares of common stock, 20,000 shares of Series B
convertible preferred stock, 7,143 shares of Series C convertible preferred
stock convertible into 7,564 shares of common stock and 37,857 shares of
Series F convertible preferred stock, and shares issuable upon exercise of
an option to purchase 1,250 shares of common stock.
(5) Includes 15,000 shares of common stock, 16,791 shares of Series B
convertible preferred stock, 22,829 shares of Series C convertible
preferred stock convertible into 24,175 shares of common stock and 15,000
shares of Series D convertible preferred stock convertible into 15,064
shares of common stock, and shares issuable upon exercise of an option to
purchase 1,250 shares of common stock.
(6) Includes 15,000 shares of common stock, 25,000 shares of Series C
convertible preferred stock convertible into 26,475 shares of common stock,
15,000 shares of Series D convertible preferred stock convertible into
15,064 shares of common stock, and shares issuable upon exercise of an
option to purchase 10,250 shares of common stock.
(7) Includes 50,000 shares of common stock, 50,000 shares of Series D
convertible preferred stock convertible into 50,215 shares of common stock,
and shares issuable upon exercise of options to purchase 151,250 shares of
common stock. Mr. Levine has a non-voting interest as a member of
Technology Directors II, LLC and Technology Directors II BST, LLC. Mr.
Levine's holdings do not include any shares of common stock held of record
by Technology Directors II, LLC or shares of Series F convertible preferred
stock held of record by Technology Directors II BST, LLC.
(8) Includes 2,536,260 shares of common stock held of record by Technology
Directors II, LLC, and 759,404 shares of Series F convertible preferred
stock held of record by Technology Directors II, BST, LLC, all or a portion
of which may be deemed to be owned beneficially by Mr. Maki as a result of
his shared power to vote and/or dispose of the shares of our common stock
and Series F convertible preferred stock held of record respectively by
Technology Directors II, LLC and Technology Directors II BST, LLC. Mr. Maki
disclaims beneficial ownership of all of the shares, except to the extent
of his pecuniary interest in Technology Directors II, LLC and Technology
Directors II BST, LLC. Also includes shares issuable upon exercise of an
option to purchase 1,250 shares of common stock.
(9) Includes 2,536,260 shares of common stock held of record by Technology
Directors II, LLC, and 759,404 shares of Series F convertible preferred
stock held of record by Technology Directors II, BST, LLC, all or a portion
of which may be deemed to be owned beneficially by Mr. O'Malley as a result
of his shared power to vote and/or dispose of the shares of our common
stock and Series F convertible preferred stock held of record respectively
by Technology Directors II, LLC and Technology Directors II BST, LLC. Mr.
O'Malley disclaims beneficial ownership of all of the shares, except to the
extent of his pecuniary interest in Technology Directors II, LLC and
Technology Directors II BST, LLC. Also includes shares issuable upon
exercise of an option to purchase 1,250 shares of common stock.
(10) Includes 2,536,260 shares of common stock held of record by Technology
Directors II, LLC, and 759,404 shares of Series F convertible preferred
stock held of record by Technology Directors II, BST, LLC all or a portion
of which may be deemed to be owned beneficially by Mr. TenBroek as a result
of his shared power to vote and/or dispose of the shares of our common
stock and Series F convertible preferred stock held of record respectively
by Technology Directors II, LLC and Technology Directors II, BST LLC. Mr.
TenBroek disclaims beneficial ownership of all of these shares, except to
the extent of his pecuniary interests in Technology Directors II, LLC and
Technology Directors II BST, LLC. Also includes 4,340 shares of common
stock held in an individual retirement account for the benefit of Mr.
TenBroek and 4,660 shares of common stock held in an individual retirement
account for the benefit of Mr. TenBroek's wife, with respect to which Mr.
TenBroek may be deemed to be a beneficial owner, and shares issuable upon
exercise of an option to purchase 1,250 shares of common stock.
(11) Includes 106,364 shares of Series G convertible preferred stock, and shares
issuable upon exercise of an option to purchase 1,250 shares of common
stock.
(12) Includes 110,525 shares of common stock, 150,794 shares of Series A
convertible preferred stock, 75,751 shares of Series B convertible
preferred stock, 62,225 shares of Series C convertible preferred stock
convertible into 65,896 shares
47
<PAGE> 52
of common stock, 60,525 shares of Series D convertible preferred stock
convertible into 60,785 shares of common stock, held in the names of Dr.
Zaidenweber, the estate of Dr. Zaidenweber's wife and Toreador, S.A., a
corporation of which Dr. Zaidenweber may be deemed to exercise control, and
shares issuable upon exercise of an option to purchase 1,250 shares of
common stock.
(13) Includes 184,020 shares of common stock, and shares issuable upon the
exercise of options to purchase 14,250 shares of common stock.
(14) Includes 13,913 shares of common stock and shares issuable upon the
exercise of options to purchase 16,250 shares of common stock.
(15) Includes 186,000 shares of common stock and shares issuable upon the
exercise of an option to purchase 16,250 shares of common stock.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering, we will be authorized to issue shares
of common stock, no par value, and shares of undesignated preferred
stock, no par value, after giving effect to the amendment of our certificate of
incorporation to delete references to the existing convertible preferred stock
following conversion of that stock. The following description of capital stock
gives effect to the certificate of incorporation to be filed prior to the
closing of this offering. Immediately following the completion of this offering,
and assuming no exercise of the underwriters' over-allotment option, an
aggregate of shares of common stock will be issued and outstanding,
and no shares of convertible preferred stock will be issued and outstanding.
The following description of our capital stock is subject to and qualified by
our certificate of incorporation and bylaws, which are included as exhibits to
the registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for dividends. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Our common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be outstanding upon
completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of our
authorized but unissued shares of preferred stock with any dividend, redemption,
conversion and exchange provisions as may be provided in the particular series.
Any series of preferred stock may possess voting, dividend, liquidation and
redemption rights superior to those of the common stock. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. Issuance of a new series of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of entrenching our board of directors and making
it more difficult for a third-party to acquire, or discourage a third-party from
acquiring, a majority of our outstanding voting stock. We have no present plans
to issue any shares of or designate any series of preferred stock.
WARRANTS
At March 15, 2000, there was a warrant outstanding to purchase a total of
1,232,061 shares of our common stock at an exercise price of $13.23 per share.
The warrant exercise price is subject to increase up to $15.21 on September 1,
2000. The warrant expires on the earlier of August 31, 2003 or two years after
the termination of the Dow agreement. The warrant contains antidilutive
provisions providing for adjustments of the exercise price and the number of
shares of common stock underlying the warrants upon the occurrence of any sale
of shares below the warrant price, recapitalization, reclassification, stock
dividend, stock split, stock combination or similar transaction. The shares of
common stock issuable upon exercise of the warrants carry registration rights,
as discussed below. The warrant has a net exercise provision under which the
holder may, in lieu of payment of the exercise price in cash, surrender the
warrant and receive a net amount of shares based on the fair market value of our
common stock at the time of exercise of the warrant after deduction of the total
exercise price.
At March 15, 2000 there were additional warrants outstanding to purchase a total
of 29,322 shares of our common stock and shares of our Series E convertible
preferred stock which will convert into 146,875 shares of our common stock upon
the completion of this offering.
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<PAGE> 54
REGISTRATION RIGHTS
Upon completion of this offering, the holders of an aggregate of approximately
shares of our common stock and warrants to purchase an aggregate of
shares of our common stock will be entitled to certain rights with
respect to the registration of the shares under the Securities Act. These rights
are provided under the terms of agreements between us and the holders of these
securities. If we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering subject to the registration to
limit the number of shares included in the registration. Holders of these rights
may also require us to file a registration statement under the Securities Act at
our expense at any time six months after the closing of this offering with
respect to their shares of common stock, and we are required to use our best
efforts to effect the registration, subject to conditions and limitations. In
addition, stockholders with registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations. Upon registration, these shares will be freely tradeable in the
public market without restriction.
COMPLIANCE WITH CALIFORNIA LAW
We are currently subject to Section 2115 of the California General Corporation
Law. Section 2115 provides that, regardless of a company's legal domicile,
certain provisions of California corporate law will apply to that company if
more than 50% of its outstanding voting securities are held of record by persons
having addresses in California and the majority of the company's operations
occur in California. For example, while we are subject to Section 2115,
stockholders may cumulate votes in electing directors. This means that each
stockholder may vote the number of votes equal to the number of candidates
multiplied by the number of votes to which the stockholder's shares are normally
entitled in favor of one candidate. This potentially allows minority
stockholders to elect some members of the board of directors. When we are no
longer subject to Section 2115, cumulative voting will not be allowed and a
holder of 50% or more of our voting stock will be able to control the election
of all directors. In addition to this difference, Section 2115 has the following
additional effects:
- Enables removal of directors with or without cause with majority
stockholder approval
- Places limitations on the distribution of dividends
- Extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of shares
and
- Provides for information rights and required filings in the event we
effect a sale of assets or complete a merger
We anticipate that our common stock will be qualified for trading as a national
market security on the Nasdaq National Market and that we will have at least 800
stockholders of record by the record date for our 2000 annual meeting of
stockholders. If these two conditions occur, then we will not be subject to
Section 2115 as of the record date for our 2000 annual meeting of stockholders.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Our certificate of incorporation authorizes our board to establish one or more
series of undesignated preferred stock, the terms of which can be determined by
our board at the time of issuance. See "-- Preferred Stock." Our certificate of
incorporation also provides that all stockholder action must be effected at a
duly called meeting of stockholders and not by written consent. In addition, our
certificate of incorporation and bylaws do not permit our stockholders to call a
special meeting of stockholders. Only our Chief Executive Officer, President,
Chairman of the Board or a majority of the board of directors are permitted to
call a special meeting of stockholders. Our bylaws require that stockholders
give advance notice to our secretary of any nominations for director or other
business to be brought by stockholders at any stockholders' meeting, and that
the chairman of the board has the authority to adjourn any meeting called by the
stockholders. Our bylaws also require a supermajority vote of members of the
board of directors and/or stockholders to amend certain bylaw provisions. These
provisions of our restated certificate of incorporation and our bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the company. These provisions also may have the effect of
preventing changes in the management of the
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<PAGE> 55
company. See "Risk Factors -- Provisions of our charter documents and Delaware
law may inhibit a takeover, which could adversely affect our stock price."
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
- prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by:
-- persons who are directors and also officers; and
-- employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66.66% of the outstanding voting stock that
is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is Equiserve L.P. Its
telephone number is (781) 575-2469.
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<PAGE> 56
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock and
we cannot predict the effect, if any, that market sales of shares of our common
stock or the availability of shares of our common stock for sale will have on
the market price of common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of our common stock in the public market could
adversely affect the market price of our common stock and could impair our
future ability to raise capital through the sale of our equity securities.
Upon the completion of this offering we will have shares of common
stock outstanding and excluding:
- 2,774,255 shares of common stock issuable upon the exercise of stock
options outstanding at March 15, 2000 at a weighted average exercise
price of $8.10 per share
- 552,325 shares of common stock reserved for issuance under our stock
option plans at March 15, 2000, and
- 1,408,258 shares of common stock issuable upon the exercise of warrants
outstanding at March 15, 2000 at a weighted average exercise price of
$12.33 per share.
Of the outstanding shares, all of the shares sold in this offering will be
freely tradable, except that any shares held by our "affiliates," as that term
is defined in Rule 144 promulgated under the Securities Act, may only be sold in
compliance with the limitations described below. The remaining shares
of common stock will be deemed "restricted securities" as defined under Rule
144. Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
NUMBER OF
SHARES DATE
- --------- ------------------------------------------------------------
<S> <C>
After the date of this prospectus, freely tradable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day or the 240-day lock-ups
described below.
After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
144 (subject, in some cases, to volume limitations) or Rule
144(k)
After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
701 (subject to repurchase by us)
After 240 days from the date of this prospectus, a 240-day
lock-up entered into by each of our officers and directors
and certain related persons is released and these shares are
saleable under Rule 144 (subject, in some cases, to volume
limitations) or Rule 144(k) or, in certain cases, Rule 701
(subject to repurchase by us)
After 240 days from the date of this prospectus, restricted
securities that are held for less than one year and are not
yet saleable under Rule 144
</TABLE>
RULE 144
In general, under Rule 144 as currently in effect, a person, or group of persons
whose shares are required to be aggregated, including any of our affiliates, who
has beneficially owned shares for at least one year, including the holding
period of any prior owner who is not an affiliate, is entitled to sell within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of one percent of the
then-outstanding shares of our common stock, which will be approximately
shares immediately after this offering, or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
prior owner who is not an affiliate, would be entitled to sell these shares
under Rule 144(k) without regard to the requirements described above. To the
extent that shares were acquired from one of our affiliates, a person's holding
period for the purpose of effecting a sale under Rule 144 would commence on the
date of transfer from the affiliate.
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<PAGE> 57
RULE 701
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144, but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director or
consultant to Large Scale Biology who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding requirements of Rule 144. Rule 701
further provides that non-affiliates may sell their Rule 701 shares in reliance
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144.
Stock Options
As of March 15, 2000, options to purchase a total of 2,774,255 shares of common
stock were outstanding, approximately 40% which were currently exercisable. We
intend to file a Form S-8 registration statement under the Securities Act to
register all shares of common stock issuable under our 2000 stock incentive plan
and our employee stock purchase plan. Accordingly, shares of common stock
underlying these options will be eligible for sale in the public markets,
subject to vesting restrictions or the lock-up agreements described below. See
"Management -- Benefit Plans."
Lock-up Agreements
Each of our officers and directors and shareholders related to them have agreed,
subject to limited exceptions, not to sell, without the prior written consent of
J.P. Morgan Securities Inc., or otherwise dispose of any shares of our common
stock, or securities substantially similar to our common stock, or options to
acquire shares of our common stock or take any action to do any of the foregoing
during the 240-day period following the date of this prospectus. The executive
officers, directors and related shareholders subject to the 240-day lock-up own
an aggregate of shares. Additionally, we and other shareholders
owning an aggregate of shares have agreed to a substantially similar
restriction for 180 days after the date of this prospectus, excluding issuances
of options and common stock by us pursuant to employee stock option plans
existing on the date of this prospectus. J.P. Morgan Securities Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to the 180-day lock-up agreements. See "Underwriting."
Registration Rights
Upon completion of this offering, the holders of an aggregate of approximately
shares of our common stock and warrants to purchase an aggregate of
shares of our common stock will be entitled to certain rights with
respect to the registration of the shares under the Securities Act. These rights
are provided under the terms of agreements between us and the holders of these
securities. If we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering subject to the registration to
limit the number of shares included in the registration. Holders of these rights
may also require us to file a registration statement under the Securities Act at
our expense at any time six months after the closing of this offering with
respect to their shares of common stock, and we are required to use our best
efforts to effect the registration, subject to conditions and limitations. In
addition, stockholders with registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations. Upon registration, these shares will be freely tradeable in the
public market without restriction.
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<PAGE> 58
UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
common stock applicable to Non-United States Holders of this common stock. For
the purpose of this discussion, a Non-United States Holder is any holder that
for U.S. federal income tax purposes is not a U.S. person. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant in light of a Non-United States Holder's particular facts and
circumstances, such as being a U.S. expatriate or a pass-through entity, and
does not address any tax consequences arising under the laws of any state, local
or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based
on current provisions of the Internal Revenue Code of 1986, as amended, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly with retroactive
effect. Large Scale Biology has not and will not seek a ruling from the Internal
Revenue Service with respect to the U.S. federal income and estate tax
consequences described below, and as a result, there can be no assurance that
the Internal Revenue Service will not disagree with or challenge any of the
conclusions set forth in this discussion. For purposes of this discussion, the
term U.S. person means:
- a citizen or resident of the United States;
- a corporation or other entity created or organized in the United States
or under the laws of the United States or any political subdivision
thereof;
- an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
DIVIDENDS
If Large Scale Biology pays a dividend, any dividend paid to a Non-United States
Holder of common stock generally will be subject to U.S. withholding tax either
at a rate of 30% of the gross amount of the dividend or such lower rate as may
be specified by an applicable tax treaty. Dividends received by a Non-United
States Holder that are effectively connected with a U.S. trade or business
conducted by the Non-United States Holder are exempt from such withholding tax.
However, those effectively connected dividends, net of certain deductions and
credits, are taxed at the same graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a U.S.
trade or business of the corporate Non-United States Holder may also be subject
to a branch profits tax at a rate of 30% or such lower rate as may be specified
by an applicable tax treaty.
A Non-United States Holder of common stock that is eligible for a reduced rate
of withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of his common stock
unless:
- the gain is effectively connected with a U.S. trade or business of the
Non-United States Holder (which gain, in the case of a corporate
Non-United States Holder, must also be taken into account for branch
profits tax purposes);
- the Non-United States Holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale
or disposition occurs and certain other conditions are met; or
- Large Scale Biology is or has been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the holder's
holding period for its common stock. Large Scale Biology has determined
that it is not and does not believe that it will become a "United States
real property holding corporation" for U.S. federal income tax purposes.
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<PAGE> 59
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, Large Scale Biology must report annually to the Internal Revenue
Service the amount of dividends paid, the name and address of the recipient, and
the amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the Internal Revenue Service may
make its reports available to tax authorities in the recipient's country of
resident.
Dividends paid to a Non-United States Holder at an address within the U.S. may
be subject to backup withholding at a rate of 31% if the Non-United States
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and other information to the payer.
Backup withholding will generally not apply to dividends paid to Non-United
States Holders at an address outside the U.S. on or prior to December 31, 2000
unless the payer has knowledge that the payee is a United States person. Under
recently finalized Treasury Regulations regarding withholding and information
reporting, payment of dividends to Non-United States Holders at an address
outside the U.S. after December 31, 2000 may be subject to backup withholding at
a rate of 31% unless such Non-United States Holder satisfies various
certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of common stock outside the U.S. to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holders' non-U.S.
status and certain other conditions are met, or the holder otherwise establishes
an exemption. Neither backup withholding nor information reporting generally
will apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on an
investment in the common stock. Those final Treasury Regulations are generally
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns common stock at the time of his
death or had made certain lifetime transfers of an interest in common stock will
be required to include the value of that common stock in such holder's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON STOCK BY
NON-UNITED STATES HOLDERS. INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF
COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
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<PAGE> 60
UNDERWRITING
We and the underwriters named below have entered into an underwriting agreement
covering the common stock to be offered in this offering. J.P. Morgan Securities
Inc., Chase Securities Inc. and William Blair & Company, L.L.C. are acting as
representatives of the underwriters. Each underwriter has agreed to purchase the
number of shares of common stock set forth opposite its name in the following
table.
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
----------------
<S> <C>
UNDERWRITERS
J.P. Morgan Securities Inc. ................................
Chase Securities Inc. ......................................
William Blair & Company, L.L.C. ............................
-------
Total.............................................
=======
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if these shares are delivered to and accepted
by them. The underwriters will initially offer to sell shares to the public at
the initial public offering price shown on the cover page of this prospectus.
The underwriters may sell shares to securities dealers at a discount of up to
$ per share from the initial public offering price. Any of these securities
dealers may resell shares to other brokers or dealers at a discount of up to
$ per share from the initial public offering price. After the initial public
offering, the underwriters may vary the public offering price and other selling
terms.
If the underwriters sell more shares than the total number shown in the table
above, the underwriters have the option to buy up to an additional
shares of common stock from us to cover these sales. They may exercise this
option during the 30-day period from the date of this prospectus. If any shares
are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as shown in the table above.
The following table shows the per share and total underwriting discounts that we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total............................................. $ $
</TABLE>
The underwriters may purchase and sell shares of common stock in the open market
in connection with this offering. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
slowing a decline in the market price of the common stock while this offering is
in progress. The underwriters may also impose a penalty bid, which means that an
underwriter must repay to the other underwriters a portion of the underwriting
discount received by it. An underwriter may be subject to a penalty bid if the
representatives of the underwriters, while engaging in stabilizing or short
covering transactions, repurchase shares sold by or for the account of that
underwriter. These activities may stabilize, maintain or
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<PAGE> 61
otherwise affect the market price of the common stock. As a result, the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If the underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these transactions on the
Nasdaq National Market, in the over-the-counter market or otherwise.
We estimate that the total expenses of this offering payable by us, excluding
underwriting discounts, will be $ .
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
Each of our executive officers and directors and shareholders related to them
have agreed with the underwriters that, subject to limited exceptions, during
the period beginning from the date of this prospectus and continuing to and
including the date 240 days after the date of this prospectus, none of us will,
directly or indirectly, offer, sell, offer to sell, contract to sell or
otherwise dispose of any shares of common stock or any securities which are
substantially similar to the common stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, common stock or any such substantially similar securities or
enter into any swap, option, future, forward or other agreement that transfers,
in whole or in part, the economic consequence of ownership of common stock or
any securities substantially similar to the common stock, other than pursuant to
employee stock option plans existing on the date of this prospectus. The
executive officers, directors and related shareholders subject to the 240-day
lock-up own an aggregate of shares. Additionally, we and other
shareholders owning an aggregate of shares have agreed to a
substantially similar restriction for 180 days after the date of this
prospectus, excluding issuances of options and common stock by us pursuant to
employee stock option plans existing on the date of this prospectus. J.P. Morgan
Securities Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to the 180-day lock-up
agreements.
At our request, the underwriters have reserved shares of common stock for sale
to our directors, officers, employees, consultants and family members of the
foregoing. We expect these persons to purchase no more than percent of the
common stock offered in this offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares.
We intend to apply to list our common stock listed on the Nasdaq National Market
under the symbol "LSBC."
It is expected that delivery of the shares will be made to investors on or about
, 2000.
There has been no public market for the common stock prior to this offering. We
and the underwriters will negotiate the initial offering price. In determining
the price, we and the underwriters expect to consider a number of factors in
addition to prevailing market conditions, including:
- the history of and prospects for our industry and for biotechnology
companies generally;
- an assessment of our management;
- our present operations;
- our historical results of operations;
- the trend of our revenues and earnings; and
- our earnings prospects.
We and the underwriters will consider these and other relevant factors in
relation to the price of similar securities of generally comparable companies.
Neither we nor the underwriters can assure investors that an active trading
market will develop for the common stock, or that the common stock will trade in
the public market at or above the initial offering price.
From time to time in the ordinary course of their respective businesses, certain
of the underwriters and their affiliates have engaged and may in the future
engage in commercial banking and/or investment banking transactions with us and
our affiliates.
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LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by Brobeck,
Phleger & Harrison LLP, San Francisco, California. Legal matters in connection
with the offering will be passed on for the underwriters by Cahill Gordon &
Reindel, New York, New York.
CHANGE IN INDEPENDENT AUDITORS
Effective December 1999, Deloitte & Touche LLP was engaged as our independent
auditors and PricewaterhouseCoopers LLP was dismissed as our independent
auditors. The decision to change auditors was approved by our Board of
Directors. The former independent auditors' report on the Company's financial
statements as of and for the years ended December 31, 1997 and 1998 did not
contain an adverse opinion, a disclaimer of opinion or any qualifications or
modifications related to uncertainty, limitation of audit scope or application
of accounting principles. PricewaterhouseCoopers LLP has not reported on any
financial statements or information related to the Company included in this
prospectus.
In the period from January 1, 1997 through the date at which Deloitte & Touche
LLP was engaged as our independent auditors, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused them to reference the subject matter of the disagreement
in any of their reports.
Deloitte & Touche LLP audited the financial statements for the years ended
December 31, 1997 and 1998 included in this prospectus. Prior to December 1999,
we had not consulted with Deloitte & Touche LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our financial
statements.
EXPERTS
The consolidated financial statements of Large Scale Biology Corporation,
formerly Biosource Technologies, Inc., and its subsidiaries as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of Large Scale Proteomics, formerly Large Scale Biology
Corporation, as of October 31, 1998 and 1997 and for the years then ended
included in this prospectus and elsewhere in this registration statement have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
included in reliance upon the report of such firm, given on their authority as
experts in auditing and accounting.
Those portions of the Prospectus and Registration Statement as they relate to
intellectual property in the material under the captions "Summary," "Risk
Factors -- Conflicts with our collaborators could harm our business," "Risk
Factors -- Risks Related to our Intellectual Property," "Business -- Overview,"
"Business -- Intellectual Property" and "Business -- Legal Proceedings" have
been reviewed and approved by Howrey Simon Arnold & White LLP, our patent
counsel, as experts on such matters, and are included in this prospectus in
reliance upon that review and approval.
58
<PAGE> 63
ADDITIONAL INFORMATION
We have filed with the SEC, Washington, D.C. 20549, under the Securities Act a
registration statement on Form S-1 relating to the common stock offered. This
prospectus does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to us and the shares we are offering pursuant to this prospectus, you should
refer to the registration statement and its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete, and you should refer to
the copy of that contract or other document filed as an exhibit to the
registration statement. You may read or obtain a copy of the registration
statement at the commission's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the commission at 1-800-SEC-0330. The
commission maintains a web site that contains reports, proxy information
statements and other information regarding registrants that file electronically
with the commission. The address of this web site is http://www.sec.gov.
We intend to furnish holders of our common stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish other reports as we may determine or as may be
required by law.
59
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
----
PAGE
----
<S> <C>
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.):
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION):
Report of Independent Accountants........................... F-22
Balance Sheets as of October 31, 1998 and 1997.............. F-23
Statements of Operations and Accumulated Deficit for the
Years Ended October 31, 1998 and 1997..................... F-24
Statements of Cash Flows for the Years Ended October 31,
1998 and 1997............................................. F-25
Notes to Financial Statements............................... F-26
LARGE SCALE PROTEOMICS:
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
Unaudited Statements of Operations and Accumulated Deficit
for the Three Months Ended January 31, 1998 and 1999...... F-31
Unaudited Statements of Cash Flows for the Three Months
Ended January, 31, 1998 and 1999.......................... F-32
Notes to Unaudited Financial Statements..................... F-33
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Large Scale Biology Corporation
We have audited the accompanying consolidated balance sheets of Large Scale
Biology Corporation (formerly Biosource Technologies, Inc.) and its subsidiaries
(collectively the "Company") as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Large Scale Biology Corporation and
its subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Sacramento, California
April 3, 2000
F-2
<PAGE> 66
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,484,000 $ 6,975,000
Marketable securities..................................... 4,086,000 7,124,000
Accounts receivable, net of allowance of $1,200,000 in
1998................................................... 50,000 141,000
Prepaid expenses and other current assets................. 712,000 976,000
------------ ------------
Total current assets.............................. 8,332,000 15,216,000
Property, plant and equipment, net.......................... 5,762,000 9,504,000
Intangible assets, net...................................... 2,375,000 3,684,000
Other assets................................................ 1,121,000 3,199,000
------------ ------------
Total assets...................................... $ 17,590,000 $ 31,603,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 911,000 $ 1,419,000
Accrued expenses.......................................... 577,000 1,255,000
Current portion of long-term debt......................... 580,000 2,184,000
Deferred revenue and customer advances.................... 3,750,000 11,872,000
------------ ------------
Total current liabilities......................... 5,818,000 16,730,000
Long-term debt.............................................. 1,445,000 2,457,000
Long-term deferred revenue.................................. 4,784,000 7,898,000
------------ ------------
Total liabilities................................. 12,047,000 27,085,000
Commitments (Note 9)
Stockholders' equity:
Convertible preferred stock, no par value; 10,000,000
shares authorized; 3,319,806 and 5,605,813 shares
issued and outstanding; liquidation preference of
$16,060,000 and $38,925,000 in 1998 and 1999,
respectively........................................... 15,848,000 38,713,000
Common stock, no par value; 20,000,000 shares authorized;
6,151,533 and 6,200,456 shares issued and outstanding
in 1998 and 1999, respectively......................... 35,472,000 52,739,000
Stockholder notes receivable.............................. (32,000) (112,000)
Deferred compensation..................................... (18,000) (7,825,000)
Accumulated deficit....................................... (45,727,000) (78,997,000)
------------ ------------
Total stockholders' equity........................ 5,543,000 4,518,000
------------ ------------
Total liabilities and stockholders' equity........ $ 17,590,000 $ 31,603,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 67
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues.................................................... $ 2,108,000 $ 3,394,000 $ 16,090,000
Costs and expenses:
Development agreements.................................... 1,735,000 2,565,000 7,988,000
Research and development.................................. 5,872,000 6,973,000 9,163,000
General, administrative and marketing..................... 3,363,000 3,492,000 8,333,000
Purchased research and development........................ -- -- 19,783,000
----------- ------------ ------------
Total costs and expenses.......................... 10,970,000 13,030,000 45,267,000
----------- ------------ ------------
Loss from operations........................................ (8,862,000) (9,636,000) (29,177,000)
Other income (expense):
Litigation settlements.................................... 2,000,000 -- 1,300,000
Interest income........................................... 366,000 275,000 452,000
Interest expense.......................................... (73,000) (60,000) (302,000)
----------- ------------ ------------
Total other income (expense)...................... 2,293,000 215,000 1,450,000
----------- ------------ ------------
Net loss before provision for income taxes.................. (6,569,000) (9,421,000) (27,727,000)
Provision for income taxes.................................. -- -- 190,000
----------- ------------ ------------
Net loss.................................................... (6,569,000) (9,421,000) (27,917,000)
Warrant accretion........................................... -- (1,224,000) (5,353,000)
----------- ------------ ------------
Loss applicable to common stockholders...................... $(6,569,000) $(10,645,000) $(33,270,000)
=========== ============ ============
Net loss per share -- basic and diluted..................... $ (1.06) $ (1.70) $ (5.38)
=========== ============ ============
Weighted average shares outstanding -- basic and diluted.... 6,221,490 6,244,516 6,183,485
=========== ============ ============
Unaudited pro forma net loss per share -- basic and
diluted................................................... $ (2.88)
============
Pro forma weighted average shares outstanding -- basic and
diluted................................................... 11,553,650
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 68
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
NUMBER OF SHARES AMOUNT
----------------------- --------------------------------------------------------
CONVERTIBLE CONVERTIBLE STOCKHOLDERS'
PREFERRED COMMON PREFERRED COMMON NOTES DEFERRED
STOCK STOCK STOCK STOCK RECEIVABLE COMPENSATION
----------- --------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996...... 2,323,608 6,181,617 $ 8,531,000 $32,149,000 $ -- $ --
Exercise of warrants........... 14,000 28,000
Redemption of securities....... (1)
Conversion of Series C
convertible preferred stock
into common stock............ (2,857) 3,011 (20,000) 20,000
Issuance of Series E
convertible preferred stock
warrants for services........ 383,000
Exercise of stock options...... 81,749 163,000
Issuance of common stock for
services..................... 9,510 89,000
Issuance of common stock for
note receivable.............. 3,000 10,000 (10,000)
Net loss.......................
--------- --------- ----------- ----------- --------- ------------
Balances, December 31, 1997...... 2,320,751 6,292,886 8,894,000 32,459,000 (10,000) --
Issuance of Series F
convertible preferred
stock........................ 1,000,000 6,961,000
Common stock cancelled......... (270,000)
Issuance of common stock
warrant...................... 1,392,000
Conversion of Series C
convertible preferred stock
into common stock............ (945) 1,000 (7,000) 7,000
Exercise of stock options...... 102,594 167,000
Issuance of common stock
options for services......... 97,000 (97,000)
Issuance of common stock for
services..................... 10,353 81,000
Issuance of common stock for
note receivable.............. 14,700 22,000 (22,000)
Accretion of options issued to
consultants.................. 23,000 (23,000)
Amortization of deferred
compensation................. 102,000
Warrant accretion.............. 1,224,000
Net loss.......................
--------- --------- ----------- ----------- --------- ------------
Balances, December 31, 1998...... 3,319,806 6,151,533 15,848,000 35,472,000 (32,000) (18,000)
Issuance of Series G
convertible preferred
stock........................ 2,287,634 22,876,000
Issuance of common stock
options in connection with
business combination......... 394,000
Conversion of Series C
convertible preferred stock
into common stock............ (1,627) 1,722 (11,000) 11,000
Issuance of common stock
warrant...................... 3,411,000
Exercise of stock options...... 19,052 49,000
Issuance of common stock for
services..................... 3,149 31,000
Issuance of common stock for
note receivable.............. 25,000 82,000 (82,000)
Issuance of common stock
options for services......... 37,000 (37,000)
Deferred stock compensation.... 7,809,000 (7,809,000)
Amortization of deferred
compensation................. 129,000
Payment on notes receivable.... 2,000
Accretion of options issued to
consultants 90,000 (90,000)
Warrant accretion.............. 5,353,000
Net loss.......................
--------- --------- ----------- ----------- --------- ------------
Balances, December 31, 1999...... 5,605,813 6,200,456 $38,713,000 $52,739,000 $(112,000) $(7,825,000)
========= ========= =========== =========== ========= ============
<CAPTION>
-------------------------------
AMOUNT
------------
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ ----------------
<S> <C> <C>
Balances, December 31, 1996...... $(28,513,000) $ 12,167,000
Exercise of warrants........... 28,000
Redemption of securities....... --
Conversion of Series C
convertible preferred stock
into common stock............ --
Issuance of Series E
convertible preferred stock
warrants for services........ 383,000
Exercise of stock options...... 163,000
Issuance of common stock for
services..................... 89,000
Issuance of common stock for
note receivable.............. --
Net loss....................... (6,569,000) (6,569,000)
------------ ------------
Balances, December 31, 1997...... (35,082,000) 6,261,000
Issuance of Series F
convertible preferred
stock........................ 6,961,000
Common stock cancelled......... --
Issuance of common stock
warrant...................... 1,392,000
Conversion of Series C
convertible preferred stock
into common stock............ --
Exercise of stock options...... 167,000
Issuance of common stock
options for services......... --
Issuance of common stock for
services..................... 81,000
Issuance of common stock for
note receivable.............. --
Accretion of options issued to
consultants.................. --
Amortization of deferred
compensation................. 102,000
Warrant accretion.............. (1,224,000)
Net loss....................... (9,421,000) (9,421,000)
------------ ------------
Balances, December 31, 1998...... (45,727,000) 5,543,000
Issuance of Series G
convertible preferred
stock........................ 22,876,000
Issuance of common stock
options in connection with
business combination......... 394,000
Conversion of Series C
convertible preferred stock
into common stock............ --
Issuance of common stock
warrant...................... 3,411,000
Exercise of stock options...... 49,000
Issuance of common stock for
services..................... 31,000
Issuance of common stock for
note receivable.............. --
Issuance of common stock
options for services.........
Deferred stock compensation.... --
Amortization of deferred
compensation................. 129,000
Payment on notes receivable.... 2,000
Accretion of options issued to
consultants
Warrant accretion.............. (5,353,000)
Net loss....................... (27,917,000) (27,917,000)
------------ ------------
Balances, December 31, 1999...... $(78,997,000) $ 4,518,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 69
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.............................. $ 2,104,000 $ 11,949,000 $ 26,264,000
Cash received from litigation settlements................. 2,000,000 -- 1,300,000
Cash paid to suppliers and employees...................... (8,825,000) (11,564,000) (21,401,000)
Interest received......................................... 471,000 216,000 400,000
Interest paid............................................. (72,000) (54,000) (265,000)
----------- ------------ ------------
Net cash provided by (used in) operating
activities...................................... (4,322,000) 547,000 6,298,000
----------- ------------ ------------
Cash flows from investing activities:
Purchase of marketable securities......................... (3,049,000) (4,027,000) (7,019,000)
Proceeds from matured marketable securities............... 8,282,000 -- 4,027,000
Capital expenditures...................................... (1,722,000) (3,811,000) (5,061,000)
Net cash acquired in business combination................. -- -- 21,000
Capitalized acquisition costs............................. -- -- (53,000)
Increase in intangible and other assets................... (388,000) (765,000) (361,000)
----------- ------------ ------------
Net cash provided by (used in) investing
activities...................................... 3,123,000 (8,603,000) (8,446,000)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 191,000 167,000 49,000
Proceeds from issuance of convertible preferred stock..... -- 6,961,000 --
Proceeds from issuance of common stock warrant............ -- 1,392,000 3,411,000
Proceeds from issuance of long-term debt.................. 100,000 1,834,000 3,687,000
Change in restricted cash................................. (100,000) (839,000) (391,000)
Principal payments on long-term debt...................... (521,000) (683,000) (1,117,000)
----------- ------------ ------------
Net cash provided by (used in) financing
activities...................................... (330,000) 8,832,000 5,639,000
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents........ (1,529,000) 776,000 3,491,000
Cash and cash equivalents at beginning of period............ 4,237,000 2,708,000 3,484,000
----------- ------------ ------------
Cash and cash equivalents at end of period.................. $ 2,708,000 $ 3,484,000 $ 6,975,000
=========== ============ ============
Reconciliation of net loss to net cash provided by
(used in) operating activities
Net loss.................................................... $(6,569,000) $ (9,421,000) $(27,917,000)
----------- ------------ ------------
Depreciation of property, plant and equipment............. 556,000 686,000 2,204,000
Amortization of intangible and other assets............... 211,000 194,000 1,119,000
Charge-off of capitalized patent costs.................... 83,000 -- 1,517,000
Accrued interest and amortized discount on marketable
securities............................................. 27,000 (59,000) (45,000)
Issuance of common stock for services..................... 89,000 81,000 31,000
Issuance of convertible preferred stock warrant for
services............................................... 383,000 -- --
Purchased research and development........................ -- -- 19,783,000
Exchange of equipment for services........................ 59,000 -- --
Amortization of deferred stock compensation............... 102,000 129,000
Changes in assets and liabilities:
Accounts receivable.................................... 665,000 31,000 54,000
Prepaid expenses and other current assets.............. 56,000 (194,000) (357,000)
Accounts payable....................................... 252,000 317,000 528,000
Accrued expenses....................................... (134,000) 276,000 (554,000)
Deferred revenue and customer advances................. -- 8,534,000 9,806,000
----------- ------------ ------------
Total adjustments................................. 2,247,000 9,968,000 34,215,000
----------- ------------ ------------
Net cash provided by (used in) operating activities......... $(4,322,000) $ 547,000 $ 6,298,000
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 70
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Large Scale Biology Corporation (formerly Biosource Technologies, Inc.) and its
subsidiaries (collectively the "Company") applies its proprietary and functional
genomics technologies to develop products and establish commercial
collaborations with pharmaceutical and other life science companies.
The Company is a California Corporation which was founded in 1987 to develop the
GENEWARE(R) system, a viral-based gene expression technology in plants, that
enables the discovery, development and production of new biopharmaceuticals and
gene-based agricultural products. The Company's proprietary systems are
supported by patents, patent applications and exclusive technology licenses.
In February 1999, the Company acquired majority control of Large Scale
Proteomics Corporation ("Proteomics"; formerly Large Scale Biology) and its
automated, high throughput ProGEX system which provides a snapshot of the
protein composition, or proteome, of cells and tissues, and is being used to
rapidly identify changes in proteins that are associated with diseases or with a
therapeutic effect.
The Company maintains its headquarters and research facility in Vacaville,
California, a processing facility in Owensboro, Kentucky and an additional
research facility in Rockville, Maryland.
Basis of Consolidation -- The accompanying 1999 consolidated financial
statements include the accounts of Large Scale Biology and its subsidiaries;
including Proteomics which was 92.5% owned by the Company during 1999 (see Note
2). All significant intercompany balances and transactions have been eliminated.
The financial statements for 1997 and 1998 include only the accounts of Large
Scale Biology Corporation.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported revenue and expenses during the period. Actual
results could differ from those estimates.
Cash and Cash Equivalents -- The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Marketable Securities -- The Company classifies all of its marketable securities
at December 31, 1998 and 1999 as held-to-maturity. They consist of commercial
paper maturing within one year. The amortized cost of marketable securities at
December 31, 1998 and 1999 approximates fair value. There were no significant
holding gains or losses at December 31, 1998 and 1999.
Concentrations of Credit Risk -- Revenues from three customers represented 40%,
25% and 25%, respectively, of total revenues during 1997. Revenues from one
customer represented 84% and 88% of total revenues during 1998 and 1999
respectively. The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. Cash is deposited primarily with
one financial institution. Cash equivalents and marketable securities consist of
high credit quality instruments and management regularly monitors their
composition and maturities. Substantially all of the Company's accounts
receivable are derived from revenue earned from customers located within the
United States. Management monitors the amount of credit exposure related to
accounts receivable on an ongoing basis and, generally, requires no collateral
from its customers. The Company maintains allowances for probable losses,
including $1,200,000 recorded at December 31, 1998 related to a receivable in
connection with a license and supply agreement (see Note 3).
F-7
<PAGE> 71
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The following is a summary of the Company's allowance for accounts receivable
for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------
ADDITIONS
----------------------- BALANCE AT
BALANCE AT BEGINNING CHARGED TO END IF
OF PERIOD OPERATIONS DEDUCTIONS PERIOD
-------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997....................... $ 0 $1,200,000 -- $1,200,000
Year Ended December 31, 1998....................... $1,200,000 -- -- $1,200,000
Year Ended December 31, 1999....................... $1,200,000 -- $1,200,000 $ 0
</TABLE>
Property, Plant and Equipment -- Property, plant and equipment are stated at
cost. Depreciation of machinery and equipment and leasehold improvements is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from 3 to 10 years, or the lease term, whichever is
shorter. Building depreciation is computed using the straight-line method over
the estimated useful life of 30 years.
Intangible Assets -- The Company's policies with respect to intangible assets
are as follows:
- - Patents -- The legal costs of filing patent applications are capitalized. Once
patents are issued, those costs are amortized over the shorter of the
statutory or estimated economic life, which generally ranges from 5 to 17
years.
- - Purchased Technology -- The Company pays license fees and reimburses patent
legal costs to individuals, universities and other companies under various
licensing agreements. These agreements provide the Company with exclusive
licenses or rights to the specified technologies. These costs have been
capitalized and are amortized over the shorter of the license term or the
estimated economic life, which ranges from 4 to 5 years.
- - Core Technology and Assembled Work Force -- Core technology and assembled work
force represents intangible assets related to the Company's acquisition of
Proteomics (see Note 2). The core technology and assembled workforce are being
amortized over 4 and 5 years, respectively.
Long-Lived Assets -- The Company accounts for the impairment of long-lived
assets in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. As required by
the statement, the Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets or intangibles may not be recoverable. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
The Company periodically reevaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated useful lives
of the long-lived assets. The criteria used for these evaluations include
management's estimate of the asset's continuing ability to generate income from
operations and positive cash flows in future periods as well as the strategic
significance of any intangible asset in the Company's business objectives.
As a result of its evaluation in 1999, intangible assets totaling $1,517,000
were charged to general and administrative expense. The charge was the result of
the Company's determination that the legal settlement in 1999 (see Note 3)
related to an agreement that expired on December 31, 1998, indicated that
certain patents and the underlying technology would have limited or no future
commercial value.
Revenue Recognition -- Revenues are derived from development agreements
consisting of research funding, technology access fees and milestone payments.
Research funding revenue is recognized as services are performed and expenses
are incurred. Revenue from technology access fees is recognized ratably over the
life of the development agreement. Revenue related to
F-8
<PAGE> 72
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
milestone payments is recognized ratably from the date of completion of the
specified milestone over the remaining life of the development agreement.
Comprehensive Income -- Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, requires that all items recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other annual
financial statements. There were no items of other comprehensive income (loss)
and therefore comprehensive loss was the same as net loss for all periods
presented.
Research and Development -- Research and development costs that are related to
customer funded development agreements are expensed as incurred and recorded as
cost of development agreements. Research and development costs not related to
customer funded development agreements are expensed as incurred and reported as
research and development expense.
Stock-Based Compensation -- The Company accounts for stock-based awards using
the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. As such, compensation is recorded on the
date of issuance or grant as the excess of the current estimated fair value of
the underlying stock over the purchase or exercise price. Any deferred
compensation is amortized over the respective vesting periods of the equity
instruments, if any. The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which permits nonpublic entities to
provide pro forma net loss and net loss per share disclosure for stock-based
compensation as if the minimum value method defined in SFAS No. 123 had been
applied. As required by SFAS No. 123, transactions with nonemployees, in which
goods or services are the consideration received for the issuance of equity
instruments, are accounted for under the fair value basis in accordance with
SFAS No. 123.
Income Taxes -- The Company accounts for income taxes under the asset and
liability approach where deferred income tax assets and liabilities reflect the
future tax consequences, based on enacted tax laws, of the temporary differences
between financial and tax reporting at the balance sheet date.
Segment Reporting -- As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has determined that it operates in one reportable segment.
Fair value of Financial Instruments -- The carrying amount of cash and cash
equivalent, marketable securities, accounts receivable and accounts payable
approximate fair value because of the short-term nature of these instruments.
The fair value of debt instruments is based upon current interest rates for debt
instruments with comparable maturities and characteristics and approximates the
carrying amount.
Historical Net Loss Per Share -- Basic net loss per share is computed by
dividing the loss applicable to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the loss applicable to common
stockholders, for the period by the weighted average number of common and
potential common shares outstanding during the period. Potentially dilutive
securities weighted average number of shares (3,288,965 in 1997, 3,823,207 in
1998 and 8,368,537 in 1999) composed of incremental common shares issuable upon
the exercise of stock options and warrants, and common shares issuable on
conversion of convertible preferred stock, were excluded from historical diluted
loss per share because of their anti-dilutive effect.
Pro Forma Net Loss Per Share (Unaudited) -- Pro forma net loss per share has
been computed as described above and also includes common shares arising from
convertible preferred stock that will automatically convert upon the closing of
the initial public offering contemplated by this prospectus.
F-9
<PAGE> 73
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Recently Issued Accounting Standards -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities and is effective for
the Company beginning the first quarter of fiscal year beginning January 1,
2001. The statement requires balance sheet recognition of derivatives as assets
or liabilities measured at fair value. Accounting for gains and losses resulting
from changes in the values of derivatives is dependent on the use of the
derivative and whether it qualifies for hedge accounting. The Company does not
believe that the adoption of SFAS No. 133 will have a material impact on its
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. This
accounting bulletin, as amended in March 2000, is effective for the Company
beginning the second quarter of the Company's fiscal year beginning January 1,
2000. The Company does not believe that the adoption of SAB 101 will have a
material impact on its financial statements.
Reclassifications -- Certain 1997 and 1998 amounts have been reclassified in
order to conform to the 1999 presentation.
2. ACQUISITION OF LARGE SCALE PROTEOMICS
During February 1999, Large Scale Biology Corporation acquired approximately
92.5% of the outstanding common stock of Proteomics in exchange for 2,287,634
shares of the Company's Series G convertible preferred stock valued at
$22,876,000 and options to purchase 40,375 shares of the Company's common stock
valued at $394,000. This acquisition was accounted for by the purchase method.
The operating results of Proteomics are included in the consolidated statement
of operations of the Company effective February 1, 1999. As part of the
acquisition, the Company acquired the option to purchase the remaining 7.5% of
common stock of Proteomics (see Note 6). In March 2000 the Company exercised its
option and acquired the remaining 7.5% of the outstanding common stock of
Proteomics for $74,000.
The purchase price of the acquisition was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. In-process research and development of $19,783,000 and core
technology of $2,312,000 was recorded. No goodwill was recorded in connection
with the acquisition.
Purchased research and development expense represents the value of purchased
in-process research and development projects that had not reached technological
feasibility at the date of acquisition. No alternative future uses or markets
were identified for these projects because of their unique qualities. The
purchased research and development was valued by an independent appraiser using
the risk-adjusted cash flow approach, which includes an analysis of the
projected future cash flows that were expected to result from the progress made
on each of the in-process projects prior to the date of acquisition and the
risks associated with achieving such cash flows. The value allocated to
purchased in-process research and development was expensed at the date of
acquisition. Projects which had already been commercialized at the date of the
valuation were valued and recorded as core technology.
Future cash flows for in-process research and development were estimated by
first forecasting, on a project-by-project basis, total revenues expected to
result from sales of each in-process project. Revenues were not anticipated from
the in-process research and development projects until approximately one year
into the forecast. Appropriate operating expenses, cash flow adjustments and
contributory asset returns were deducted from projected future revenues, and
adjustments were made to remove the value contributed by core technology. No
anticipated expense reductions due to synergies between Large Scale Proteomics
and Large Scale Biology Corporation were assumed. The analysis resulted in a
forecast of net returns on each in-process project. These net returns were then
discounted to a present value at discount rates that incorporate the project
specific risks associated with each purchased in-process research and
development project. The project specific risk factors considered included the
complexity of the development effort, the likelihood of achieving technological
feasibility and the
F-10
<PAGE> 74
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
likelihood of market acceptance. The applied discount rate of 50% was believed
to adequately account for the additional risks associated with the in-process
technologies over other technologies existing at the acquisition date.
The forward looking data employed in the analysis of in-process research and
development were based upon management's estimate of future performance of its
business. Management believes the assumptions used were reasonable. However, the
assumptions we used may be incomplete or inaccurate, and unanticipated events
and circumstances may occur, which could cause a material adverse effect on our
financial condition and results of operations. The forecasted results used in
the analysis for the in-process projects have not varied significantly from the
actual results achieved through December 31, 1999.
A brief description of purchased in-process research development projects is set
forth below, including the status of products within each project at the
acquisition date:
- Proteomics -- The proteomics technology applies sample preparation and
fractionation high throughput, high resolution two-dimensional gels, mass
spectrometry, databases and bioinformatics software to the discovery and
development of drugs, diagnostics and agricultural chemicals. The
proteomics technology was expected to be completed in 2000.
- Virus -- The virus detection technology is intended for rapid discovery
of novel yet difficult to propagate viruses, addressing a wide range of
suspected viral diseases. Virus detection technology was expected to be
completed in 2003.
The following unaudited pro forma information gives effect to the acquisition of
Proteomics as if the acquisition had occurred on January 1, 1998 and 1999. The
pro forma results of operations exclude nonrecurring charges directly related to
the acquisition and which would effect expenses within the twelve months
following the acquisition, primarily consisting of $19,783,000 of purchased
research and development.
<TABLE>
<CAPTION>
---------------------------
1998 1999
------------ -----------
<S> <C> <C>
Revenues.................................................... $ 4,947,000 $16,141,000
Net loss.................................................... $(10,267,000) $(8,111,000)
Net loss per share -- basic and diluted..................... $ (1.64) $ (1.31)
</TABLE>
These unaudited pro forma results have been prepared by the management of the
Company for comparative purposes only. They do not purport to be indicative of
the results of operations that actually would have resulted had the combination
occurred on the date indicated and may not be indicative of future results of
operations.
3. LITIGATION SETTLEMENTS AND OTHER CHARGES
The Company reached a settlement with Advanced Polymer Systems, Inc. ("APS")
related to a License and Supply Agreement between APS and the Company that
expired on December 31, 1998. Under the settlement agreement, the Company
received $1,300,000 in cash during 1999 which was recorded as other income in
1999.
During May 1997, the Company received $2,000,000 in settlement of a lawsuit for
damages based on the loss of potential future revenue. This settlement was
recorded as other income in 1997.
F-11
<PAGE> 75
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
---------------------------
1998 1999
------------ -----------
<S> <C> <C>
Machinery and equipment..................................... $ 6,511,000 $11,340,000
Leasehold improvements...................................... 481,000 1,437,000
Building.................................................... 1,482,000 1,485,000
Construction in progress.................................... 43,000 120,000
Land........................................................ 90,000 373,000
------------ -----------
8,607,000 14,755,000
Accumulated depreciation.................................... (2,845,000) (5,251,000)
------------ -----------
$ 5,762,000 $ 9,504,000
============ ===========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets at December 31 consist of the following:
<TABLE>
<CAPTION>
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Patents..................................................... $2,019,000 $1,023,000
Purchased technology........................................ 1,024,000 900,000
Core technology and assembled work force.................... -- 2,569,000
---------- ----------
3,043,000 4,492,000
Accumulated amortization.................................... (668,000) (808,000)
---------- ----------
$2,375,000 $3,684,000
========== ==========
</TABLE>
Capitalized patent costs at December 31, 1999 include $261,000 that relates to
issued or allowed patents for which amortization has begun. The remaining
amounts relate to pending patents, amortization of which will begin when the
patents are issued or allowed.
6. OTHER ASSETS
<TABLE>
<CAPTION>
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Call option................................................. $ -- $1,787,000
Restricted cash and deposits................................ 954,000 1,345,000
Other....................................................... 167,000 67,000
---------- ----------
$1,121,000 $3,199,000
========== ==========
</TABLE>
The call option represents the fair value of an option to acquire the 7.5%
minority interest shares of Proteomics for $74,000 with an expiration date of
December 31, 2001 (see Note 2.). The Company obtained the call option as part of
the acquisition of Proteomics. The fair value of the call option was calculated
using the Black-Scholes option pricing model with the following assumptions:
volatility of 60%; risk-free interest rate of 5.1%; expected life of 2.9 years;
and no expected dividend yield.
Restricted cash and deposits primarily consist of certificates of deposit, which
are being held as security for notes payable (see Note 7).
F-12
<PAGE> 76
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
7. LONG-TERM DEBT
A summary of the Company's notes payable for December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
A $5,000,000 equipment financing arrangement entered into on
November 30, 1998 which bears interest at the commercial
bank prime interest rate (8.50% at December 31, 1999)
payable in monthly installments through October 2001 and
is secured by the financed equipment and a certificate of
deposit (see Note 6) in an amount equal to 30% of the
quarterly projected outstanding loan amount............... $1,318,000 $ 4,086,000
A $500,000 note payable which bears interest at 5% and is
payable through August 2008 in monthly installments of
$5,000. The note is secured by the Owensboro processing
facility and certain equipment............................ 487,000 447,000
A $100,000 note payable which bears interest based on the
commercial bank prime interest rate less 4% with a minimum
rate of 4% (4.0% at December 31, 1999) and is payable
through September 2007 in monthly installments of $1,000.
The promissory note is secured by an irrevocable letter of
credit.................................................... 90,000 81,000
A $750,000 note payable which bears interest of 8.25% until
May 2001 with interest only payments until May 2000 and
principal and interest payments through May 2005. The note
is secured by the Owensboro processing facility and
certain equipment......................................... -- 5,000
8.25% promissory note payable in 24 monthly installments of
$58,000 through February 1999............................. 115,000 --
Other....................................................... 15,000 22,000
---------- -----------
Total notes payable............................... 2,025,000 4,641,000
Less current portion.............................. (580,000) (2,184,000)
---------- -----------
Total long-term notes payable..................... $1,445,000 $ 2,457,000
========== ===========
</TABLE>
Future principal payments under long-term debt are:
<TABLE>
<S> <C>
2000........................................................ $2,184,000
2001........................................................ 2,033,000
2002........................................................ 59,000
2003........................................................ 59,000
2004........................................................ 62,000
Thereafter.................................................. 244,000
----------
Total principal payments.......................... $4,641,000
==========
</TABLE>
8. DOW CONTRACT
The Company entered into a Collaboration and License Agreement (the "Agreement")
with The Dow Chemical Company and its subsidiary Dow AgroSciences LLC
(collectively "Dow") on September 1, 1998. The Agreement provides funding for
sponsored genomics research, royalties upon product sales and payments when
certain milestones are achieved. The Company is entitled to all funding received
regardless of the results of the research. Accordingly, no obligation to repay
or repurchase technology has been recorded. Revenues from Dow represented 84%
and 88% of total revenues during the years ended December 31, 1998 and 1999. The
contract is for three years and is renewable annually after three years if
mutually agreed to by Dow and the Company.
F-13
<PAGE> 77
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Technology Access Fees
During 1998, the Company received cash of $10,000,000 in exchange for access to
the Company's technologies and a warrant granted to Dow (the "Dow Warrant") to
purchase 1,232,061 shares of the Company's common stock subject to certain
vesting provisions (see Note 10). Using the Black-Scholes option-pricing model,
the Company determined that the fair value of the warrant was $1,392,000 on the
issuance date and such amount was credited to common stock. The technology
access fee of $8,608,000 was recorded as deferred revenue and is being
recognized ratably over the remaining period during which the Company will be
performing research and development activities under the Agreement. Technology
access fees of $956,000 and $2,868,000 were recognized as revenue during 1998
and 1999. Deferred revenue related to technology access fees was $7,652,000 and
$4,784,000 at December 31, 1998 and 1999, respectively.
Milestone Payments
The Company received $20,000,000 during 1999 for meeting certain milestones
specified in the Agreement. These amounts, less the fair value of Dow Warrant
shares vesting during 1999 (see Note 10), were recorded as deferred revenue and
are being recognized ratably over the remaining period during which the Company
will be performing research and development activities under the Agreement.
Using the Black-Scholes option pricing model, the Company determined that the
fair value of the warrants vesting in connection with the milestone payments in
1999 was $3,411,000 and such amount was credited to common stock. Revenue of
$2,802,000 was recognized related to milestone payments received in 1999.
Deferred revenue related to milestone payments was $13,787,000 at December 31,
1999.
The Company may be eligible for additional payments of up to $5,000,000 in each
of the second and third years of the contract if certain milestones are met.
Research Funding
Dow will reimburse the Company up to $12,000,000 per contract year for certain
research expenses specified in the agreement. Revenue related to research
performed under the Agreement was $1,896,000 and $8,563,000 in 1998 and 1999,
respectively.
Amounts paid by Dow to the Company in excess of incurred expenses covered by the
agreement are recorded as customer advances of $882,000 and $106,000 at December
31, 1998 and 1999, respectively.
9. COMMITMENTS
The Company leases facilities under operating leases and incurred facility
rental expenses of $353,000, $476,000 and $659,000 during 1997, 1998 and 1999,
respectively. Additionally, the Company has entered into research sponsorship
agreements with major universities, government institutions and other companies.
These agreements provide for research funding by the Company for specific
projects of interest to the Company. Expenses under these and other agreements
with various consultants totaled $2,555,000, $3,145,000 and $4,127,000 during
1997, 1998 and 1999, respectively. Future payments under operating leases and
research and consulting agreements are:
<TABLE>
<CAPTION>
-----------------------
RESEARCH
AND
OPERATING CONSULTING
LEASES AGREEMENTS
--------- ----------
<S> <C> <C>
2000........................................................ $541,000 $4,097,000
2001........................................................ -- 2,332,000
2002........................................................ -- 783,000
-------- ----------
$541,000 $7,212,000
======== ==========
</TABLE>
F-14
<PAGE> 78
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The Company has also entered into license agreements with major universities
that provide for royalties upon product sales and minimum annual royalty
amounts. These arrangements remain in effect until there are no longer any
related unexpired patents or upon termination by the Company. Royalty payments
were $0, $78,000 and $207,000 during 1997, 1998 and
1999, respectively. Future annual minimum royalty amounts range from $275,000 to
$415,000.
Non-cancelable minimum payments under operating leases, research and consulting
agreements and royalty agreements at December 31, 1999 are $541,000, $3,248,000
and $39,000, respectively.
The Company has committed to spend $942,000 as of December 31, 1999 principally
for the construction of certain facilities at its Owensboro processing facility.
10. STOCKHOLDERS' EQUITY
Common stock
In July 1998, the Company cancelled 270,000 shares of its common stock that were
received from a stockholder upon settlement of a legal dispute. The cancellation
had no impact on the Company's consolidated financial statements.
Convertible Preferred Stock
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
CONVERTIBLE COMMON ANNUAL PER
PREFERRED SHARES PER SHARE SHARE
SHARES CONVERSION RESERVED FOR DIVIDEND LIQUIDATION
OUTSTANDING RATE CONVERSION RATE VALUE
----------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Series A............................. 666,667 1.0000 666,667 $0.12 $ 1.50
Series B............................. 878,003 1.0000 878,003 $0.24 $ 3.00
Series C............................. 338,336 1.0590 358,297 $0.56 $ 7.00
Series D............................. 435,173 1.0043 437,044 $0.56 $ 7.00
Series E............................. -- 1.0000 100,000 $0.32 $ 4.00
Series E............................. -- 1.0000 46,875 $0.96 $12.62
Series F............................. 1,000,000 1.0000 1,000,000 $0.56 $ 7.00
Series G............................. 2,287,634 1.0000 2,287,634 $0.80 $10.00
--------- ---------
5,605,813 5,774,520
========= =========
</TABLE>
Significant terms of the outstanding convertible preferred stock are as follows:
- Each share of convertible preferred stock is convertible into shares of
common stock at the ratio in the above table (subject to adjustment for
events of dilution), at the option of the stockholder. Unless
automatically converted, holders of Series G convertible preferred stock
may not convert their shares until two years after their issuance date.
Each series of convertible preferred stock will be automatically
converted into common stock upon the voluntary conversion of 66.7% of all
outstanding shares of convertible preferred stock, or upon effectiveness
of a registration statement under the Securities Act of 1933 meeting
certain criteria.
- Holders of Series A, Series B, Series C, Series D, and Series F
convertible preferred stock have the right to vote on an
"as-if-converted" basis with the holders of common stock. Holders of
Series G convertible preferred stock are entitled to the number of votes
equal to 3/4 of the number of shares of common stock into which such
shares could be converted. Certain actions of the Company require
majority approval by the holders of the Series A convertible preferred
stock.
F-15
<PAGE> 79
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- Series E convertible preferred stock have not been issued and are
reserved for issuance upon the exercise of certain warrants (see
"warrants" below).
- Dividends on the shares of convertible preferred stock are noncumulative.
At December 31, 1999 dividends on convertible preferred stock have not
been declared or paid.
- In the event of liquidation, dissolution or winding up of the Company,
convertible preferred shareholders are entitled to receive their
liquidation preference, plus any declared and unpaid dividends with
respect to such shares prior to any distributions to other stockholders.
Dividend and liquidation amounts which are less than the convertible
preferred stock dividend or liquidation preferences are payable ratably
among the stockholders of convertible preferred stock in proportion to
the respective dividend rates or liquidation values. Upon completion of
the distribution, the holders of the common stock will receive all
remaining assets of the corporation.
Put Option
Under the terms of its acquisition of Proteomics, the Company granted holders of
the Series G convertible preferred stock the right, but not the obligation, to
require that the Company repurchase the Series G convertible preferred stock at
$10 per share in the event the Company either (1) sells 50% or more of its
shares of Proteomics common stock or (2) sells substantially all of the assets
of Proteomics to a non-affiliated third party. The put options expire in
February 2002 or upon an initial public offering meeting certain criteria.
Warrants
The Company has reserved 1,232,061 shares of common stock for issuance upon the
exercise of a warrant granted on September 1, 1998 to Dow in conjunction with
the Agreement. The warrant consisted of two tranches, one for 410,687 shares of
common stock and one for 821,374 shares of common stock. The first tranche was
immediately exercisable and expires upon the earlier of August 31, 2003 or two
years after the termination of the Agreement. The second tranche was initially
exercisable through February 28, 1999 after which it terminated, but was
effectively regranted and becomes exercisable when and if the Company receives
certain milestone payments under the Agreement (see Note 8). During 1999, the
Company received the milestone payments and as a result, all 1,232,061 shares of
common stock were exercisable under the warrant at December 31, 1999. Under the
terms of the Agreement, the warrant was initially exercisable at $10.00 a share
through February 28, 1999; thereafter $11.50 a share through August 31, 1999;
thereafter $13.23 a share through August 31, 2000; thereafter $15.21. If the
warrant is exercised and the Company has not effected an initial public offering
of its common stock by December 31, 2008, the Company must arrange a private
sale of the related common stock or repurchase the related common stock at its
fair market value as determined by a nationally recognized investment bank.
The fair value of this warrant was determined to be $1,392,000 on the date of
grant using the Black-Sholes option-pricing model with the following
assumptions: expected volatility of 60%; risk-free interest rates of 5.0%;
expected life of 5 years for the first tranche and six months for the second
tranche; and no dividend yield. The fair market value of the second tranche was
determined to be $3,411,000 on the dates of the effective regranting during 1999
using the Black-Sholes option-pricing model. The following assumptions were used
to revalue the second tranche during 1999: expected volatility of 60%, risk-free
interest rates from 5.2% to 5.5%; expected life of 4.2 to 4.5 years; and no
expected dividend yield.
At December 31, 1998 and 1999 the Company accreted $1,224,000 and $5,353,000,
respectively, related to changes in the fair value of the warrant. These amounts
were recorded as a charge to accumulated deficit. Such charge increased the loss
applicable to common stockholders. The following assumptions were used at
December 31, 1998 and 1999 to determine the accretion amount: expected
volatility of 60%, risk-free interest rates from 4.6% to 6.4%; expected life of
4.7 years and 0.2 years during 1998 and 3.7 years during 1999, and no expected
dividend yield.
F-16
<PAGE> 80
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The Company granted warrants to purchase 146,875 shares of Series E convertible
preferred stock during 1997. A warrant to purchase 46,875 shares of Series E
convertible preferred stock was granted to an employee. This warrant is
exercisable at $12.62 per share, expires on May 20, 2001 and is fully
exercisable.
A warrant to purchase 100,000 shares of Series E convertible preferred stock was
granted to a marketing consultant. This warrant is exercisable at $4.00 per
share, expires on February 20, 2002 and is exercisable upon a public offering of
common stock priced in excess of $9.00 per share with gross proceeds exceeding
$15,000,000, or upon the voluntary conversion of 66.7% of all outstanding shares
of convertible preferred stock. The granting of this warrant resulted in the
Company recording non-cash expense of $383,000 pursuant to SFAS No. 123. The
fair value of this warrant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 60%; risk-free interest rate of 5.7%; expected life of 4.1 years;
and no dividend yield. The Company has reserved 146,875 shares of Series E
convertible preferred stock for issuance upon the exercise of these warrants and
146,875 shares of common stock for issuance upon the subsequent conversion of
the Series E convertible preferred stock.
The Company has also reserved 29,322 shares of common stock for issuance upon
the exercise of a warrant granted during 1988. This warrant is currently
exercisable to purchase common stock at $2.39 per share, and expires five years
after an initial public offering of common stock.
Stock Plans
The Company has adopted the 1988, 1990, 1992 and 1999 Stock Plans (the
"Plans"). Under the terms of the Plans, the Company's employees, officers,
directors and consultants may be granted options to purchase, or allowed to
immediately purchase, shares of the Company's common stock. The terms of options
or exercise price are determined by the Board of Directors. Stock options
granted under the Plans are exercisable over a ten-year period from the grant
date and have a vesting period ranging from immediate vesting to four years.
Options granted under the Plans may be either incentive stock options or
nonqualified stock options. Incentive stock options may be granted only to
Company employees (including officers and directors who are also employees).
Nonqualified stock options may be granted to Company employees, directors and
consultants. Incentive and nonqualified stock options granted under the Plans
may be granted at exercise prices no less than 100% and 85%, respectively, of
the estimated fair value of the company's common stock on the date of grant.
However, an option granted to a 10% shareholder under the Plans shall be granted
at an exercise price not less than 110% of the estimated fair value of the
Company's common stock on the date of the grant.
The Company has authorized 3,900,000 shares of common stock for issuance under
the Plans. There were 552,325 shares of common stock available for grant at
December 31, 1999. The Plans include a net exercise provision whereby shares of
the Company's stock which have been owned for more than one year can be
exchanged at fair market value to pay for the exercise of stock options.
Employees exchanged 2,530, 3,075 and 5,062 shares of common stock to exercise
options under the net exercise provision during 1997, 1998 and 1999,
respectively.
F-17
<PAGE> 81
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Outstanding options are summarized as follows:
<TABLE>
<CAPTION>
---------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1996.............................. 1,695,679 $ 3.91
Granted................................................... 100,000 7.00
Exercised................................................. (87,279) 2.35
Forfeited................................................. (264,800) 3.19
---------
Outstanding, December 31, 1997.............................. 1,443,600 4.35
Granted................................................... 131,000 7.34
Exercised................................................. (120,369) 1.82
Forfeited................................................. (15,000) 12.62
---------
Outstanding, December 31, 1998.............................. 1,439,231 4.75
Granted................................................... 1,585,375 10.43
Exercised................................................. (49,114) 3.71
Forfeited................................................. (145,287) 3.33
---------
Outstanding, December 31, 1999.............................. 2,830,205 $ 8.02
=========
Options exercisable:
December 31, 1997......................................... 1,311,260 $ 3.82
December 31, 1998......................................... 1,251,944 $ 4.23
December 31, 1999......................................... 1,161,811 $ 4.59
</TABLE>
The activity in the table above includes options granted to consultants during
1998 and 1999 of 16,000 shares and 5,000 shares, respectively. There were no
options granted to consultants in 1997. The number of options outstanding at
December 31, 1999 includes 627,525 options to consultants.
The weighted-average fair value of options granted was $2.92 in 1997, $2.55 in
1998 and 10.69 in 1999.
The following table summarizes information about stock options outstanding and
exercisable under the Plans at December 31, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------------
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
--------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.40......................................... 40,375 8.3 years $ 0.40 23,955 $ 0.40
$ 2.00 to $ 3.50............................... 799,330 2.1 years $ 3.08 799,330 $ 3.08
$ 4.50 to $ 7.00............................... 295,500 6.8 years $ 6.28 210,711 $ 5.99
$10.00 to $12.62............................... 1,695,000 9.7 years $10.84 127,815 $12.52
--------- ---------
2,830,205 7.2 years $ 8.02 1,161,811 $ 4.59
========= =========
</TABLE>
The fair value of each option granted to employees was estimated on the date of
grant using the minimum value method with the following weighted-average
assumptions used for grants made during 1997, 1998 and 1999: risk-free interest
rates of 6.1%, 5.6% and 6.5%, respectively; expected life of nine, six and six
years, respectively; and no expected dividend yield.
F-18
<PAGE> 82
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Pro Forma Net Loss
If compensation cost for the Company's stock-based compensation plans and the
warrant granted to an employee had been determined based on the fair value at
the grant dates consistent with a method prescribed by SFAS No. 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported............................................... $(6,569,000) $(9,421,000) $(27,917,000)
Pro forma................................................. $(6,909,000) $(9,636,000) $(28,393,000)
Loss per common share:
As reported:
Basic and diluted...................................... $ (1.06) $ (1.51) $ (4.51)
Pro forma:
Basic and diluted...................................... $ (1.11) $ (1.54) $ (4.59)
</TABLE>
Stock Compensation
The Company issued 1,030,000 options to employees, officers and directors on
December 31, 1999. These options are exercisable at between $10.00 and $11.25
per share, have a 10 year life and vest in quarterly installments over 3 years.
Deferred compensation in the amount of $7,809,000 was recorded as the difference
between the exercise price and the estimated fair value of the common stock as
of December 31, 1999. In December 1999, certain officers and key employees were
granted options that will become exercisable upon an initial public offering
("IPO"), among other conditions. As a result, non-cash compensation expense will
be recognized upon completion of an IPO based on the difference between the
exercise price of those options and the IPO price.
The Company also issued options to purchase 16,000 shares of common stock to
consultants during 1998. These options are exercisable at $7.00 per share, have
a 10-year life and vest over periods ranging from one to three years. The
Company issued an option to purchase 5,000 shares of common stock to a
consultant during 1999. This option is exercisable at $10.00 per share, has a
10-year life and vests over three years. The issuance and subsequent revaluation
of these options resulted in the Company recording deferred expense of $120,000
and $127,000 during 1998 and 1999. The fair value of each option granted was
estimated on the date of grant and each option was revalued periodically until
it vested using the Black-Scholes option-pricing model with the following
weighted-average assumptions during 1998 and 1999: expected volatility of 60%;
risk-free interest rate of 5.1% and 6.1%, respectively; initial expected life of
ten years; and no expected dividend yield.
The Company issued 9,510 shares of common stock valued at $89,000 during 1997,
10,353 shares of common stock valued at $81,000 during 1998, and 3,149 shares of
common stock valued at $31,000 during 1999 to SRI International in exchange for
research and development services.
Stockholders' Notes Receivable
The Company's Board of Directors has approved loans up to a maximum of $650,000
for salaried employees who are not officers to exercise options to purchase
shares of the Company's common stock. Employees borrowed $10,000 to purchase
3,000 shares of common stock in 1997, $22,000 to purchase 14,700 shares of
common stock in 1998 and $82,000 to purchase 25,000 shares of common stock in
1999. The notes are for full recourse and have been recognized within
stockholders' equity.
F-19
<PAGE> 83
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution retirement plan covering all
employees who meet minimum eligibility requirements. During 1997, 1998 and 1999,
the Company made discretionary matching contributions equal to 50% of the amount
each employee elected to contribute up to a maximum Company match of 3% of an
employee's compensation. The Company's contributions under this plan amounted to
$79,000, $92,000 and $155,000 for 1997, 1998 and 1999, respectively.
12. INCOME TAXES
The components of the Company's income tax provision for the years ended
December 31 consist of:
<TABLE>
<CAPTION>
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $190,000
State..................................................... -- -- --
Deferred.................................................... -- -- --
-------- -------- --------
Income tax provision.............................. $ -- $ -- $190,000
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate. The effective tax rate and the statutory
federal income tax rate for the years ended December 31 are reconciled as
follows:
<TABLE>
<CAPTION>
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate................ (35.0)% (35.0)% (35.0)%
Purchased research and development.......................... -- -- 24.2
Research and development credits............................ (5.3) (4.0) (1.9)
Change in valuation allowance for income taxes.............. 41.2 39.9 12.4
Other....................................................... (0.9) (0.9) 1.0
----- ----- -----
0.0% 0.0% 0.7%
===== ===== =====
</TABLE>
The significant components of net deferred tax assets recorded in the Company's
balance sheet at December 31 are:
<TABLE>
<CAPTION>
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue.......................................... $ 2,976,000 $ 7,661,000
Net operating loss carryforwards.......................... 13,939,000 12,072,000
Tax credit carryforwards.................................. 3,043,000 4,555,000
Capitalized project costs................................. 1,371,000 1,235,000
Allowance for bad debts................................... 513,000 --
Other..................................................... 131,000 235,000
------------ ------------
Total deferred tax assets......................... 21,973,000 25,758,000
------------ ------------
Deferred tax liabilities:
Amortization of intangible assets......................... (1,144,000) (1,470,000)
------------ ------------
Total deferred tax liabilities.................... (1,144,000) (1,470,000)
------------ ------------
Valuation allowance......................................... (20,829,000) (24,288,000)
------------ ------------
Net deferred income tax asset............................... $ -- $ --
============ ============
</TABLE>
F-20
<PAGE> 84
LARGE SCALE BIOLOGY CORPORATION
(FORMERLY BIOSOURCE TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
At December 31, 1999, the Company has net operating loss carryforwards available
to reduce future taxable income of approximately $32,726,000 for federal income
tax reporting purposes expiring from 2006 through 2018, and $11,108,000 for
state income tax reporting purposes expiring from 2001 through 2003. The
difference between the federal and state net operating loss carryforwards is
attributed to the California limitation of loss carryforwards to 50% of net
operating losses and the capitalization of certain research costs for state
income tax purposes. Additionally, at December 31, 1999, the Company has
research and development credit carryforwards and alternative minimum tax
carryforwards of approximately $2,657,000 available to reduce future federal
income taxes expiring from 2003 through 2013 and $1,898,000 available to reduce
future state income taxes with no date of expiration. The Company has fully
reserved all net deferred tax assets, primarily consisting of net operating loss
and tax credit carryforwards, as management does not believe that their future
realization is more likely than not.
The extent to which the loss carryforwards can be used to offset future taxable
income may become limited if changes in the Company's stock ownership exceed
certain defined limits.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company issued 2,287,634 shares of Series G convertible preferred stock in
exchange for 92.5% of the outstanding common stock of Proteomics (see Note 2).
Net cash acquired in connection with the Proteomics acquisition is as follows:
<TABLE>
<S> <C>
Issuance of Series G convertible preferred stock............ $ 22,876,000
Issuance of stock options................................... 394,000
Fees and expenses........................................... 53,000
Less fair value of noncash net assets acquired.............. (23,302,000)
------------
Net cash acquired........................................... $ 21,000
============
</TABLE>
Equipment with a net book value of $59,000 was exchanged for research services
during 1997.
During 1997, 1998 and 1999 the Company issued 3,000, 14,700 and 25,000 shares of
its common stock in exchange for $10,000, $22,000 and $82,000 in notes
receivable.
The Company recorded deferred compensation of $120,000 in 1998 and $7,936,000 in
1999 related to the issuance of common stock options.
14. RELATED PARTY TRANSACTIONS
Two of the Company's directors are managing directors of Technology Directors,
Inc. In 1998, the Company entered into a consulting and business development
arrangement with Technology Directors, Inc. to provide management advisor
services to the Company. In addition to compensation for these management
advisory services, Technology Directors, Inc. received a fee in connection with
amounts received under the Agreement with Dow. Expenses related to this
consulting arrangement totaled $302,000 and $644,000 during 1998 and 1999,
respectively, and were included in general, administrative and marketing
expenses. Amounts owed under this arrangement at December 31, 1998 and 1999
totaled $35,000 and $15,000, respectively, and are included in accounts payable.
Pursuant to an employment agreement with an employee and founder of Proteomics,
the Company is obligated to pay the employee $20,833 per month over two years
for a five-year non-compete agreement. In addition, the Company entered into a
license and consulting agreement with the employee covering certain biochip
technology developed by him. This agreement provides for a $4,000 per month
consulting fee over two years and license fees of $6,667 per month over five
years. The license is a worldwide, exclusive non-royalty bearing license to the
biochip technology. Expenses related to these arrangement totaled $190,000
during 1999. Amounts owed under these arrangements at December 31, 1999 were
$625,000 and were included in accounts payable and accrued expenses.
F-21
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Large Scale Proteomics
In our opinion, the accompanying balance sheets and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of Large Scale Proteomics (formerly
Large Scale Biology Corporation) (the Company) as of October 31, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
January 15, 1999,
except as to Note 10,
as to which the date is February 5, 1999
F-22
<PAGE> 86
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 194,989 $ 28,535
Accounts receivable....................................... 158,657 125,285
---------- ---------
Total current assets.............................. 353,646 153,820
Property and equipment, net................................. 757,930 207,341
Patents, net................................................ 10,875 22,388
---------- ---------
Total assets...................................... $1,122,451 $ 383,549
========== =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 128,896 $ 103,717
Accrued salaries and benefits............................. 385,538 366,079
Capital lease obligations................................. 22,911 21,185
Notes payable............................................. 14,276 7,635
Deferred revenue.......................................... 628,133 256,602
Deferred revenue -- equipment purchases................... 599,550 --
---------- ---------
Total current liabilities......................... 1,779,304 755,218
Capital lease obligations, net of current portion........... 13,686 36,855
---------- ---------
Total liabilities................................. 1,792,990 792,073
---------- ---------
Mandatorily redeemable preferred stock, class B, par value
$.001; 200,000 shares authorized; 163,800 shares issued
and outstanding........................................... 259,238 251,048
Commitments and contingencies
Shareholders' deficit:
Preferred stock, class A, par value $.001; 11,800,000
shares authorized; none issued and outstanding......... -- --
Common stock, class A, par value $.001; 20,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, class B, par value $.001; 10,000,000 shares
authorized; 9,795,081 shares issued and outstanding.... 9,795 9,795
Accumulated deficit....................................... (939,572) (669,367)
---------- ---------
Total shareholders' deficit....................... (929,777) (659,572)
---------- ---------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' deficit......... $1,122,451 $ 383,549
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 87
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue:
Grant and commercial research revenue..................... $1,304,646 $1,026,025
Instrumentation and software support...................... 147,577 246,179
---------- ----------
Total revenue..................................... 1,452,223 1,272,204
Operating expenses.......................................... 1,708,268 1,359,656
---------- ----------
Loss from operations................................... (256,045) (87,452)
Other income and (expenses):
Other expenses............................................ (402) (20,053)
Interest expense.......................................... (9,151) (5,835)
Interest income........................................... 3,583 866
Other income.............................................. -- 270
---------- ----------
Net loss............................................... (262,015) (112,204)
Accumulated deficit:
Balance, beginning of year................................ (669,367) (548,973)
Preferred stock dividends................................. (8,190) (8,190)
---------- ----------
Balance, end of year...................................... $ (939,572) $ (669,367)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 88
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(262,015) $(112,204)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 130,052 63,486
Loss on disposal of property and equipment............. -- 17,961
Changes in assets and liabilities:
Accounts receivable.................................. (33,372) (57,050)
Other current assets................................. -- 11,938
Accounts payable and accrued expenses................ 25,179 (64,229)
Accrued salaries and benefits........................ 19,459 21,892
Deferred revenue..................................... 371,531 172,860
Deferred revenue -- equipment purchases.............. 599,550 --
--------- ---------
Net cash provided by operating activities......... 850,384 54,654
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (663,869) (36,337)
Costs of patents.......................................... (5,259) (9,354)
--------- ---------
Net cash used in investing activities............. (669,128) (45,691)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable............................... 6,641 --
Principal payments on notes payable....................... -- (7,492)
Principal payments on obligations under capital leases.... (21,443) (1,520)
--------- ---------
Net cash used in financing activities............. (14,802) (9,012)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 166,454 (49)
Cash, beginning of year..................................... 28,535 28,584
--------- ---------
Cash, end of year........................................... $ 194,989 $ 28,535
========= =========
Supplemental schedule of non-cash investing and financing
activities:
Property and equipment acquired under capital lease
obligations............................................ $ -- $ 59,560
Refinancing of notes payable.............................. $ 7,635 $ --
Preferred stock dividends................................. $ 8,190 $ 8,190
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 9,151 $ 5,835
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 89
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Large Scale Proteomics (the Company), formerly Large Scale Biology Corporation,
was incorporated in the State of Delaware and commenced operations in February
1987. The Company builds large-scale protein databases and the analytical
instrumentation and software necessary for their development. The databases
permit the evaluation of metabolic changes at the protein level providing a
unique tool for the discovery and development of new and/or improved drugs and
diagnostics. The Company intends to commercialize its databases via
non-exclusive, multi-year subscriptions to pharmaceutical, diagnostic and
biotechnology customers in conjunction with related services such as proprietary
studies (for client provided samples) and, for strategic partners, technology
transfer. The Company's core business is in two dimensional gel electrophoresis
and analytical database software technology utilized by pharmaceutical customers
seeking contract studies, software, instrumentation and consulting. In addition
to its commercial activities, the Company also invests significantly in
technology development funded through numerous federal research and development
(R&D) grants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts invested in accounts which are readily
convertible to cash with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management believes that contract receivables are fully collectible and no
allowance for doubtful accounts is necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases is
recorded at the lower of fair value or the net present value of future minimum
lease payments determined at the inception of the lease. Depreciation of assets
is calculated over the estimated useful lives, ranging from 5 to 7 years, of the
assets using the straight-line method. Upon retirement, the cost and related
accumulated depreciation is eliminated from the respective accounts and the
resulting gain or loss, if any, is included in operations. Equipment under
capital leases is amortized over the lease term or the estimated useful life of
the asset, whichever is less. Maintenance and repairs are charged to expense as
incurred.
PATENTS
Legal costs incurred for patent research and application expenses are
capitalized as incurred and amortized on a straight-line basis over the
estimated useful life of the patents, once granted. The estimated useful life of
all patents is 5 years.
LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets utilizing
qualitative and quantitative factors. At such time as an impairment in value is
identified, the impairment will be quantitatively measured in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and charged to operations.
REVENUE RECOGNITION
Commercial research revenue is recognized as services are performed. Deferred
commercial revenue represents that portion of revenue received, which has not
yet been earned. Grant revenue is recognized as expenses are incurred and
billed, except that revenue received for equipment purchases is deferred and
recognized as revenue as the related equipment is depreciated. Revenue from the
sale of instrumentation is recognized upon shipment of the product, provided
that the fee is fixed and determinable, persuasive evidence of an arrangement
exists and collection of the resulting receivable is probable. The
F-26
<PAGE> 90
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company has not experienced any returns of its products. Revenue related to
software support is recognized ratably over the terms of the related agreements.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and totaled $764,358 and
$662,190 for the years ended October 31, 1998 and 1997, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents in bank deposit
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company does not believe it is
exposed to any significant credit risk on cash and cash equivalents.
The majority of the Company's revenue is derived through grants with the U.S.
Government. For the years ended October 31, 1998 and 1997, approximately 60% and
81%, respectively, of the Company's revenue was derived from these agreements.
At October 31, 1998 and 1997, the U.S. Government represented approximately 40%
and 37%, respectively, of the total accounts receivable balance. At October 31,
1998, one commercial customer represented approximately 15% of that total
accounts receivable balance. Additionally, at October 31, 1997, three commercial
customers represented approximately 17%, 10% and 10%, respectively, of the total
accounts receivable balance.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the current tax provision for the period plus the change
during the period in deferred tax assets and liabilities.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
--------------------
OCTOBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Office furniture and equipment.............................. $256,507 $208,314
Laboratory equipment........................................ 724,436 116,667
-------- --------
980,943 324,981
Less accumulated depreciation............................... 223,013 117,640
-------- --------
Property and equipment...................................... $757,930 $207,341
======== ========
</TABLE>
F-27
<PAGE> 91
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company leases certain office and laboratory equipment under capital leases.
As of October 31, 1998, the cost and accumulated amortization related to these
capital leases was $67,956 and $17,145, respectively. As of October 31, 1997,
the cost and accumulated amortization related to these capital leases was
$67,956 and $4,039, respectively.
Depreciation expense was $113,280 and $52,667 for the years ended October 31,
1998 and 1997, respectively.
4. PATENTS
Patents consist of the following:
<TABLE>
<CAPTION>
----------------------
OCTOBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Patents..................................................... $ 128,711 $ 123,452
Accumulated amortization.................................... (117,836) (101,064)
--------- ---------
$ 10,875 $ 22,388
========= =========
</TABLE>
Amortization expense was $16,772 and $10,819 for the years ended October 31,
1998 and 1997, respectively.
5. NOTES PAYABLE
The Company issued a note payable for $6,641 during 1998. This note bears
interest at 10% and matures on November 1, 1999.
The Company borrowed $7,635 from Company officers on October 31, 1997, evidenced
by non-interest bearing notes payable due October 31, 1998. During fiscal 1998,
the Company renegotiated the terms of these notes, which now mature on November
1, 1999.
6. INCOME TAXES
The significant components of deferred tax assets and liabilities are temporary
differences arising from the following at October 31:
<TABLE>
<CAPTION>
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities):
Property and equipment.................................... $(251,757) $ (35,423)
Accrued expenses.......................................... 148,895 141,380
Net operating loss carryforwards.......................... 104,858 48,993
Deferred revenue.......................................... 357,659 99,100
Research and experimentation credit carryforwards......... 88,036 71,036
Deferred rent............................................. 13,211 9,523
--------- ---------
460,902 334,609
Valuation allowance....................................... (460,902) (334,609)
--------- ---------
Net deferred tax asset............................ $ -- $ --
========= =========
</TABLE>
Realization of net deferred tax assets at the balance sheet date are dependent
upon future earnings which are uncertain. Accordingly, a full valuation
allowance was recorded against these assets as of October 31, 1998 and 1997.
The Company has available at October 31, 1998, unused operating loss
carryforwards of $271,512, which may be applied against future taxable income,
expiring in various years through 2018. The Company has tax credit carryforwards
of $88,036 expiring beginning in 2007 to reduce future federal income taxes to
the extent permitted under the Internal Revenue Code.
F-28
<PAGE> 92
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases certain equipment under capital leases expiring at various
dates through 2000. The Company occupies office space and laboratory facilities
under an operating lease with an original term in excess of one year. The
Company has been granted free rent periods under the office and laboratory
lease, which contains a fixed annual rent escalation clause. The accompanying
statements of operations reflects rent expense of $127,956 and $131,596 computed
on a straight-line basis over the term of the lease for the years ended October
31, 1998 and 1997, respectively. Included in accounts payable and accrued
expenses at October 31, 1998 and 1997 were $24,659 and $34,208, respectively, of
deferred rent.
Future minimum lease payments at October 31, 1998 are as follows:
<TABLE>
<CAPTION>
--------------------
OPERATING CAPITAL
LEASE LEASE
--------- -------
<S> <C> <C>
1999........................................................ $147,065 $26,874
2000........................................................ 99,985 14,573
-------- -------
$247,050 41,447
========
Less amount representing interest........................... 4,850
-------
36,597
Less current portion........................................ 22,911
-------
Long-term portion........................................... $13,686
=======
</TABLE>
PROPERTY AND EQUIPMENT
During the fiscal year ended October 31, 1998, $656,542 of property and
equipment was purchased with Federal grant funds. Although title vests with the
Company, the final disposition of the property and equipment procured with these
funds resides with the Federal Government.
LITIGATION AND CLAIMS
The Company from time to time is subject to litigation relating to matters in
the ordinary course of business. The Company believes that any ultimate
liability resulting from these contingencies will not have a material adverse
effect on the Company's results of operations or financial position.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
Under the terms of the Company's Certificate of Relative Rights and Preferences,
the holders of the Class B Mandatorily Redeemable Preferred Stock (Preferred
Stock) are entitled to redeem the Preferred Stock at any time on or after
January 1, 1997 for $1.00 per share plus all cumulative dividends unpaid to date
at an annual rate of $.05 per share. These dividends hold preference to the
holders of the Company's Common Stock and Class A Preferred Stock. For each of
the years ended October 31, 1998 and 1997, the Company recorded dividends of
$8,190. In the event of liquidation or dissolution of the Company, the holders
of the Preferred Stock are entitled to $1.00 per share plus all cumulative
dividends unpaid to date of liquidation.
9. STOCK OPTIONS
During fiscal 1998, the Company granted non-qualified common stock options to
certain of its employees at $.10 per share, the estimated fair value of the
underlying common stock at the date of grant. The options expire ten years from
the date of grant
F-29
<PAGE> 93
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and vest either immediately or one-fourth on the first anniversary of the
employee's date of hire and pro rata on a monthly basis thereafter.
Stock option activity for 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
------------------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE CONTRACTUAL
NUMBER OF EXERCISE LIFE
OPTIONS PRICE IN YEARS
--------- -------- -----------
<S> <C> <C> <C>
Outstanding October 31, 1996................................ 100,000 $0.001 0.58
Granted................................................... -- -- --
Exercised................................................. -- -- --
Expired or cancelled...................................... -- -- --
-------
Outstanding October 31, 1997................................ 100,000 0.001 0.58
Granted................................................... 107,500 0.10 9.14
Exercised................................................. -- -- --
Expired or cancelled...................................... -- -- --
-------
Outstanding October 31, 1998................................ 207,500 $ 0.05 5.02
=======
Exercisable............................................... 186,070 $ 0.05
=======
</TABLE>
The Company elected the disclosure-only presentation of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
123), in fiscal 1997 and, consequently, makes no charge against operations in
the financial statements with respect to the fair value of the options granted.
To measure stock-based compensation in accordance with SFAS No. 123, the fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model.
The following table sets forth the assumptions used and the pro forma net loss
resulting from applying SFAS No. 123:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $ (262,015)
Pro forma................................................. $ (265,517)
Risk-free interest rate..................................... 4.4% to 5.9%
Expected life in years...................................... 10
Dividend yield.............................................. 0%
Volatility.................................................. 0%
Weighted average remaining contractual life in years........ 9.1
Weighted average fair value at date of grant in dollars..... $ 0.04
</TABLE>
10. SUBSEQUENT EVENTS
On January 25, 1999, the Company signed an agreement with Biosource
Technologies, Inc. (Biosource) whereby Biosource would purchase at least 80% of
the common stock of the Company from certain shareholders. For each share of
Company common stock tendered to Biosource, the shareholder will receive
one-fourth of a share of Series G Preferred Stock of Biosource. As of February
5, 1999, eighty percent of the outstanding common stock of the Company had been
tendered to Biosource.
On January 28, 1999, the Company redeemed all of the outstanding shares of Class
B Preferred Stock for $261,286.
F-30
<PAGE> 94
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
UNAUDITED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999
<TABLE>
<CAPTION>
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenue..................................................... $ 275,000 $ 338,000
Operating expenses.......................................... 378,000 289,000
--------- ---------
Income (loss) from operations............................... (103,000) 49,000
Other income (expense)...................................... (2,000) --
--------- ---------
Net income (loss)........................................... (105,000) 49,000
Accumulated deficit:
Balance, October 31....................................... (669,000) (940,000)
Preferred stock dividends................................. (2,000) (2,000)
--------- ---------
Balance, January 31....................................... $(776,000) $(893,000)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 95
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999
<TABLE>
<CAPTION>
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(105,000) $ 49,000
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of property and equipment................. 14,000 43,000
Changes in assets and liabilities:
Accounts receivable.................................. 48,000 14,000
Accounts payable and accrued expenses................ (7,000) (257,000)
Deferred revenue..................................... 272,000 295,000
--------- ---------
Net cash provided by operating activities......... 222,000 144,000
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (136,000) (51,000)
--------- ---------
Net cash used in investing activities............. (136,000) (51,000)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of note payable.................... 26,000 --
Redemption of preferred stock............................. -- (261,000)
Principal payments on long-term debt...................... (5,000) (6,000)
--------- ---------
Net cash provided by (used in) financing
activities........................................ 21,000 (267,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 107,000 (174,000)
Cash and cash equivalents at beginning of period............ 29,000 195,000
--------- ---------
Cash and cash equivalents at end of period.................. $ 136,000 $ 21,000
========= =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 96
LARGE SCALE PROTEOMICS
(FORMERLY LARGE SCALE BIOLOGY CORPORATION)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999
1. BASIS OF PRESENTATION
Large Scale Proteomics Corporation (formerly Large Scale Biology Corporation)
(the "Company") builds large-scale protein databases and the analytical
instrumentation and software necessary for their development. The Company's core
business is in two dimensional gel electrophoresis and analytical database
software technology utilized by pharmaceutical customers seeking contract
studies, software, instrumentation and consulting.
Basis of Accounting -- These financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported revenue and expenses during the period. Actual
results could differ from those estimates.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods
presented. All adjustments are normal recurring entries. Such financial
statements are not necessarily indicative of the results to be expected for the
full year.
2. LARGE SCALE BIOLOGY CORPORATION
In January 1999, the Company entered into an agreement ("Agreement") to be
acquired by Large Scale Biology Corporation (formerly Biosource Technologies,
Inc.) ("Parent Corporation"). In exchange for 2,287,634 shares of its Series G
convertible preferred stock, the Parent Corporation acquired 92.5% of the
Company's common stock.
In conjunction with the acquisition of the Company, certain employees waived
their rights to a portion of their deferred salaries. As a result, the Company
reversed $191,000 of previously recognized deferred salary costs during the
three months ended January 31, 1999.
Also in January 1999, the Company entered into a one year, $1,110,000 research
and development agreement with the Parent Corporation. The Company is entitled
to receive up to $1,110,000 for performance under the terms of the agreement.
Revenue will be recognized as services are provided over the term of the
agreement. The Company recognized no income for the three months ended January
31, 1999 and had $400,000 in deferred revenue at January 31, 1999 related to
this contract.
3. SUBSEQUENT EVENTS
Subsequent to February 1, 1999, the Parent Corporation provided cash advances to
the Company in exchange for a note accruing interest at 8.75% per year. The note
matures March 31, 2000. At December 31, 1999, the balance of the note was
$3,682,000 (including $126,000 of accrued interest).
On March 8, 2000, the Company exercised its option to acquire the 7.5% of the
Company's common stock not held by the Parent Corporation for $74,000. As a
result, the Company is now wholly owned by the Parent Corporation.
F-33
<PAGE> 97
[LOGO]
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us in connection with the sale of common stock
being registered. All amounts are estimates except the SEC registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $26,400
NASD Filing Fee............................................. 10,500
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent Fees......................................... *
Miscellaneous............................................... *
-------
Total............................................. *
=======
</TABLE>
- -------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to award
or a corporation's board of directors to grant indemnification to directors and
officers in terms sufficiently broad to permit the indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act"). Our
bylaws provide for mandatory indemnification of our directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. Our certificate of
incorporation provides that, subject to Delaware law, our directors will not be
personally liable for monetary damages for breach of the directors' fiduciary
duty as directors to Large Scale Biology Corporation and its stockholders. This
provision in the certificate of incorporation does not eliminate the directors'
fiduciary duty, and in appropriate circumstances equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the company or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct, or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
We have entered into indemnification agreements with our officers and directors,
a form of which will be filed with the Securities and Exchange Commission as an
exhibit to our registration statement on Form S-1 (No. 333- ). The
indemnification agreements provide our officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section of the underwriting
agreement contained in exhibit 1.1 hereto, indemnifying our officers and
directors against certain liabilities, and section 1.11 of the Third Amended and
Restated Registration Rights Agreement contained in exhibit 4.2 hereto,
indemnifying the parties thereto, including controlling stockholders, against
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued unregistered securities
to a limited number of persons as described below:
In February 1999, in connection with the acquisition of our subsidiary, Large
Scale Proteomics Corporation, we issued 2,287,634 shares of our Series G
convertible preferred stock in exchange for 92.5% of the outstanding shares of
Large Scale Proteomics Corporation's capital stock.
II-1
<PAGE> 99
In September 1998, we issued to Dow a warrant to purchase up to 1,232,061 shares
of our common stock at an exercise price of $10.00 per share, subject to
increase over time to up to $15.21 per share. As of December 31, 1999, 1,232,061
shares of common stock are exercisable under the warrant at $13.23 a share. The
warrant exercise price increases to $15.21 on September 1, 2000. The warrant
expires upon the earlier of August 31, 2003 or two years after termination of
the Dow Agreement. If the warrant is exercised and we have not effected an
initial public offering of our common stock by December 31, 2008, we must
arrange a private sale of the related common stock or repurchase the related
common stock at its fair market value as determined by a nationally recognized
investment bank.
In March and April 1998, we issued and sold 1,000,000 of our convertible Series
F convertible preferred stock to Technology Directors II BST, LLC, Brown
University Third Century Fund, Marvyn Carton and twelve other investors for an
aggregate purchase price of $7,000,000.
In January 1988, we issued to Equitec Leasing Company a warrant to purchase
29,322 shares of our common stock at an exercise price of $2.39 per share. The
warrant was transferred on January 14, 2000 to two individuals, Arnold Zimmerman
and Sebastian J. Trusso in equal portions, covering 14,661 shares each.
In December 1997, we issued to Bruce A. Boyd a warrant to purchase 46,875 shares
of our Series E convertible preferred stock at an exercise price of $12.62 per
share.
In December 1997, we issued to Bay City Capital LLC a warrant to purchase
100,000 shares of our Series E convertible preferred stock at an exercise price
of $4.00 per share.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to share certificates and instruments issued in
these transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits listed in the exhibit Index are filed as part of this registration
statement.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization, dated January 25,
1999, by and amongst registrant, the entity formerly known
as Biosource Technologies, Inc., Large Scale Biology
Corporation, N. Leigh Anderson, Constance L. Seniff and
Robert J. Walden and fourteen Large Scale Biology
shareholders.
3.1* Amended and Restated Certificate of Incorporation, to be
effective upon consummation of this offering.
3.2* Amended and Restated Bylaws, to be effective upon
consummation of this offering.
4.1* Form of registrant's Specimen Common Stock Certificate.
4.2* Information and Registration Rights Agreement dated October
11, 1990 by and among the registrant and the parties who are
signatories thereto.
4.3* Amendment to the Information and Registration Rights
Agreement dated October 11, 1990 by and among the registrant
and the parties who are signatories thereto.
4.4* Second Amendment to the Information and Registration Rights
Agreement dated October 10, 1991 by and among the registrant
and the parties who are signatories thereto.
4.5* Third Amendment to the Information and Registration Rights
Agreement dated March 20, 1998 by and among the registrant
and the parties who are signatories thereto.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
4.6* Fourth Amendment to the Information and Registration Rights
Agreement dated September 1, 1998 by and among the
registrant and the parties who are signatories thereto.
4.8* Warrant to purchase Series E Convertible Preferred Stock
dated May 31, 1997, by and between the registrant and Bruce
A. Boyd.
4.9* Warrant to purchase Series E Convertible Preferred Stock
dated February 21, 1997, by and between the registrant and
Bay City Capital LLC.
4.10 * Warrant to purchase 1,232,061 shares of common stock dated
September 1, 1998, by and between the registrant and the Dow
Chemical Company.
4.11* Warrant to purchase 29,322 shares of common stock dated
January 29, 1988, by and between the registrant and the
Equitec Leasing Company assigned in equal shares on January
14, 2000 to Arnold Zimmerman and Sebastian J. Trusso.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being
registered.
5.2* Opinion of Howrey Simon Arnold & White LLP, with respect to
those portions of the Registration Statement relating to
intellectual material.
10.1* Registrant's Amended and Restated 2000 Stock Plan.
10.2* Registrant's 2000 Stock Incentive Plan.
10.3* Registrant's 2000 Employee Stock Purchase Plan.
10.4* Form of registrant's Directors' and Officers'
Indemnification Agreement.
10.5 Dow Collaboration and License Agreement dated August 24,
1998, by and among the registrant and Dow Chemical Company
and its subsidiary Dow Agrosciences LLC.
10.6* Collaboration between National Cancer Institute and Large
Scale Biology dated January 5, 2000.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of Pricewaterhouse Coopers LLP, Independent
Auditors.
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
23.3* Consent of Howrey Simon Arnold & White LLP (contained in
their opinion filed as Exhibit 5.2)
24.1 Power of Attorney. Reference is made to Page II-5.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
- -------------------------
* To be filed by amendment
(b) Financial Statement Schedule
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified in
the underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
Delaware General Corporation Law, our certificate of incorporation or our
bylaws, indemnification agreements entered into between the company and our
officers and directors, the underwriting agreement, or otherwise, we have been
advised that in the opinion of the commission such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by us of expenses incurred or paid by any of our directors,
officers or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent,
II-3
<PAGE> 101
submit to a court of appropriate jurisdiction the question of whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective;
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vacaville, State of California, on this 6th day of
April, 2000.
By: /s/ ROBERT L. ERWIN
---------------------------------------
Robert L. Erwin
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Robert L. Erwin, David R.
McGee, Ph.D. and John S. Rakitan and each one of them, his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration statement,
and to sign any registration statement for the same offering covered by this
registration statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that each of said attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this power of attorney
as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the persons whose signatures appear
below, which persons have signed such registration statement in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ROBERT L. ERWIN Chairman of the Board and Chief Executive April 6, 2000
- ----------------------------------------------------- Officer
Robert L. Erwin (Principal Executive Officer)
/s/ DAVID R. MCGEE Senior Vice President, Chief Operating April 6, 2000
- ----------------------------------------------------- Officer and Assistant Secretary
David R. McGee, Ph.D.
/s/ LAURENCE K. GRILL Senior Vice President, Research April 6, 2000
- -----------------------------------------------------
Laurence K. Grill, Ph.D.
/s/ R. BARRY HOLTZ Senior Vice President, Bioprocess Development April 6, 2000
- -----------------------------------------------------
R. Barry Holtz, Ph.D.
/s/ JOHN S. RAKITAN Senior Vice President, General Counsel and April 6, 2000
- ----------------------------------------------------- Secretary (Principal Financial Officer)
John S. Rakitan
/s/ MICHAEL D. CENTRON Treasurer and Controller April 6, 2000
- ----------------------------------------------------- (Principal Accounting Officer)
Michael D. Centron
/s/ N. LEIGH ANDERSON Director April 6, 2000
- -----------------------------------------------------
N. Leigh Anderson, Ph.D.
</TABLE>
II-5
<PAGE> 103
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ MARVYN CARTON Director April 6, 2000
- -----------------------------------------------------
Marvyn Carton
/s/ BERNARD I. GROSSER Director April 6, 2000
- -----------------------------------------------------
Bernard I. Grosser, M.D.
/s/ CHARLES A. HAYES Director April 6, 2000
- -----------------------------------------------------
Charles A. Hayes
/s/ SOL LEVINE Director April 6, 2000
- -----------------------------------------------------
Sol Levine
/s/ JOHN W. MAKI Director April 6, 2000
- -----------------------------------------------------
John W. Maki
/s/ JOHN J. O'MALLEY Director April 6, 2000
- -----------------------------------------------------
John J. O'Malley
/s/ JAMES P. TENBROEK Director April 6, 2000
- -----------------------------------------------------
James P. TenBroek
/s/ ROBERT WALDEN Director April 6, 2000
- -----------------------------------------------------
Robert Walden
/s/ JACOBO ZAIDENWEBER Director April 6, 2000
- -----------------------------------------------------
Jacobo Zaidenweber, M.D.
</TABLE>
II-6
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization, dated January 25,
1999, by and amongst registrant, the entity formerly known
as Biosource Technologies, Inc., Large Scale Biology
Corporation, N. Leigh Anderson, Constance L. Seniff and
Robert J. Walden and fourteen Large Scale Biology
shareholders.
3.1* Amended and Restated Certificate of Incorporation, to be
effective upon consummation of this offering.
3.2* Amended and Restated Bylaws, to be effective upon
consummation of this offering.
4.1* Form of registrant's Specimen Common Stock Certificate.
4.2* Information and Registration Rights Agreement dated October
11, 1990 by and among the registrant and the parties who are
signatories thereto.
4.3* Amendment to the Information and Registration Rights
Agreement dated October 11, 1990 by and among the registrant
and the parties who are signatories thereto.
4.4* Second Amendment to the Information and Registration Rights
Agreement dated October 10, 1991 by and among the registrant
and the parties who are signatories thereto.
4.5* Third Amendment to the Information and Registration Rights
Agreement dated March 20, 1998 by and among the registrant
and the parties who are signatories thereto.
4.6* Fourth Amendment to the Information and Registration Rights
Agreement dated September 1, 1998 by and among the
registrant and the parties who are signatories thereto.
4.8* Warrant to purchase Series E Convertible Preferred Stock
dated May 31, 1997, by and between the registrant and Bruce
A. Boyd.
4.9* Warrant to purchase Series E Convertible Preferred Stock
dated February 21, 1997, by and between the registrant and
the Craves Group.
4.10 * Warrant to purchase 1,232,061 shares of common stock dated
September 1, 1998, by and between the registrant and the Dow
Chemical Company.
4.11* Warrant to purchase 29,322 shares of common stock dated
January 29, 1988, by and between the registrant and the
Equitec Leasing Company assigned in equal shares on January
14, 2000 to Arnold Zimmerman and Sebastian J. Trusso.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being
registered.
5.2* Opinion of Howrey Simon Arnold & White LLP, with respect to
those portions of the Registration Statement relating to
intellectual material.
10.1* Registrant's Amended and Restated 2000 Stock Plan.
10.2* Registrant's 2000 Stock Incentive Plan.
10.3* Registrant's 2000 Employee Stock Purchase Plan.
10.4* Form of registrant's Directors' and Officers'
Indemnification Agreement.
10.5 Dow Collaboration and License Agreement dated August 24,
1998, by and among the registrant and Dow Chemical Company
and its subsidiary Dow Agrosciences LLC.
10.6* Collaboration between National Cancer Institute and Large
Scale Biology dated January 5, 2000.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of Pricewaterhouse Coopers LLP, Independent
Auditors.
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
23.3* Consent of Howrey Simon Arnold & White LLP (contained in
their opinion filed as Exhibit 5.2).
24.1 Power of Attorney. Reference is made to Page II-5.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
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* To be filed by amendment
<PAGE> 1
EXHIBIT 10.5
COLLABORATION AND LICENSE AGREEMENT
Dated as of
September 1, 1998
By and Among
THE DOW CHEMICAL COMPANY
DOW AGROSCIENCES LLC
AND
BIOSOURCE TECHNOLOGIES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. DEFINITIONS.............................................................................2
2. SCOPE AND STRUCTURE OF THE COLLABORATION...............................................12
3. GRANTS OF RIGHTS.......................................................................12
4. CONDUCT OF PARTIES DURING THE RESEARCH COLLABORATION...................................20
5. DISCOVERY, DEVELOPMENT AND MARKETING EFFORTS...........................................26
6. PAYMENTS...............................................................................28
7. INTELLECTUAL PROPERTY..................................................................43
8. RESEARCH MATERIALS.....................................................................53
9. CONFIDENTIALITY........................................................................54
10. REPRESENTATIONS, WARRANTIES AND COVENANTS..............................................56
11. INDEMNITY..............................................................................60
12. TERM AND TERMINATION...................................................................62
13. PROVISIONS FOR INSOLVENCY..............................................................66
14. MISCELLANEOUS..........................................................................67
</TABLE>
i
<PAGE> 3
COLLABORATION AND LICENSE AGREEMENT
THIS COLLABORATION AND LICENSE AGREEMENT (the "Agreement") is dated
as of September 1, 1998 (the "Effective Date") and is made by and among
BIOSOURCE TECHNOLOGIES, INC., a corporation having its principal place of
business at 3333 Vaca Valley Parkway, Vacaville, California 95688 ("Biosource"),
THE DOW CHEMICAL COMPANY, a Delaware corporation having its principal place of
business at 2030 Willard H. Dow Center, Midland, Michigan 48674 ("TDCC"), and
DOW AGROSCIENCES LLC, a Delaware limited liability company having its principal
place of business at 9330 Zionsville Road, Indianapolis, Indiana 46268 ("DAS").
Biosource, TDCC and DAS are sometimes referred to herein individually as a
"party" and collectively as the "parties".
R E C I T A L S
WHEREAS, Biosource has developed technologies relating to the
identification and characterization of genetic materials, and has developed or
acquired certain rights, technologies, data and materials potentially useful in
the development of products.
WHEREAS, TDCC and DAS desire to obtain access and rights to
Biosource's technologies, and Biosource is willing to provide such access and
grant such rights, on the terms and for the purposes set forth in this
Agreement.
WHEREAS, DAS has developed technologies related to the development,
selection and manufacture of plants.
WHEREAS, Biosource desires to obtain access and rights to DAS's
technologies, and DAS is willing to provide such access and grant such rights,
on the terms and for the purposes set forth in this Agreement.
WHEREAS, TDCC possesses analytical expertise useful to support the
collaborative activities of DAS and Biosource contemplated in this Agreement.
WHEREAS, Biosource, DAS and TDCC desire to collaborate in the fields
defined below on the terms set forth in this Agreement.
NOW, THEREFORE, Biosource, TDCC and DAS agree as follows:
1. DEFINITIONS
For purposes of this Agreement, unless otherwise specifically stated in
this Agreement, the terms defined in this Article 1 shall have the meanings
specified below:
1.1 "Affiliate" means any corporation or other entity which directly or
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indirectly controls, is controlled by or is under common control with a party to
this Agreement. A corporation or other entity shall be regarded as in control of
another corporation or entity if it owns or directly or indirectly controls more
than fifty percent (50%) of the outstanding voting stock or other ownership
interest of the other corporation or entity, or if it possesses, directly or
indirectly, the power to manage, direct or cause the direction of the management
and policies of the corporation or other entity or the power to elect or appoint
fifty percent (50%) or more of the members of the governing body of the
corporation or other entity. Any such other relationship as in fact results in
actual control over the management, business and affairs of a corporation or
other entity shall also be deemed to constitute control. Except to the extent
explicitly provided otherwise herein, for purposes of this Agreement, members of
(i) DAS and DAS Affiliates shall not be considered to be Affiliates of members
of (ii) TDCC and Affiliates of TDCC (other than DAS and DAS Affiliates), and
members of (ii) above shall not be considered to be Affiliates of members of (i)
above. In addition, for purposes of this Agreement, Mycogen shall not be
considered to be an Affiliate of TDCC, or a DAS Affiliate, unless and until the
parties agree in writing or as provided in Section 14.15, provided, however, in
either case Mycogen itself must accept the obligations of an Affiliate
hereunder.
1.2 "Agricultural Value-Added" means, in respect of Products that
constitute seed or agrochemicals, as applicable (i) the incremental value-added
or measurable Trait premium associated with a Product Trait, net of additional
costs associated with the manufacture of the Product, when a party sells such
Product directly, and (ii) the revenue received by a party from licensees or
sublicensees which is attributable to the value-added or measurable Trait
premium associated with a Product Trait. Calculation of Agricultural Value-Added
is more specifically described in Exhibit B.
1.3 "Alliance Gene" means any nucleotide sequence or fragment thereof
that encodes for a Trait in plants, either alone or in conjunction with other
encoding sequences, and including antisense or co-suppression use thereof, which
is discovered, designed, selected, identified or modified in the course of the
Research Collaboration, but excluding the genes, nucleotide sequences or
fragments therefrom of Photorhabdus, Xenorhabdus, Bacillus thuringiensis, and
Saccharopolyspora spinosa or those covered by or derived by use of Demeter
Technology, provided that these excluded genes, nucleotide sequences and
fragments were identified without use of Discovery Technology Owned by
Biosource.
1.4 "Annual Research Plan" means the plan to be developed by Biosource
and approved by the Research Committee for each Contract Year, as described in
Section 4.5.4. A summary of the Annual Research Plan being considered by the
parties for the first Contract Year during the Research Collaboration is set
forth in Schedule I hereto.
1.5 "Biosource Agricultural Cumulative Investment" means the total
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cumulative amount of: (i) all expenses incurred and capital dedicated by
Biosource and its Affiliates during the term of this Agreement (including, but
not limited to internal expenses and capital, all payments to TDCC under this
Agreement, and amounts paid to Third Parties for research or other services, but
excluding the cost of sponsored research described in Section 6.3.1 and all
other expenses of Biosource reimbursed by TDCC), to support the discovery,
development, commercialization and manufacture of Biosource Products comprising
agrochemicals or seed, excluding Biosource Products in the Nicotiana Field and
the Pharmaceutical Field); (ii) reduced by the cumulative Value-Added by
distinct Traits derived from one or more Alliance Genes in Biosource Products
that constitute seed; and (iii) the remainder compounded on an annual basis by
the Biosource Cost of Capital.
1.6 "Biosource Cost of Capital" means, as of any date of determination,
the same rate as the TDCC Cost of Capital, established pursuant to Section 1.43.
1.7 "Biosource Crops" means plants grown for forestry and ornamental
horticulture purposes.
1.8 "Biosource Field" means the Pharmaceutical Field; the Nicotiana
Field; all uses of all Biosource Crops (provided that TDCC has not exercised the
option in Section 3.9); and all organisms in the Pharmaceutical Field and the
Nicotiana Field; provided, however, that the "Biosource Field" shall not include
the use of Alliance Genes in TDCC Crops other than for use in the Pharmaceutical
Field.
1.9 "Biosource Industrial Cumulative Investment" means the total
cumulative amount of: (i) all expenses incurred and capital dedicated by
Biosource and its Affiliates during the term of this Agreement (including, but
not limited to internal expenses and capital, all payments to TDCC under this
Agreement, and amounts paid to Third Parties for research or other services, but
excluding the cost of sponsored research described in Section 6.3.1 and all
other expenses of Biosource reimbursed by TDCC), to the discovery, development,
commercialization and/or manufacture of Biosource Products that constitute
Industrial Products (excluding Biosource Products in the Nicotiana Field and the
Pharmaceutical Field); (ii) reduced by the cumulative Value-Added by distinct
Traits derived from one or more Alliance Genes in such Biosource Products; and
(iii) the remainder compounded on an annual basis by the Biosource Cost of
Capital.
1.10 "Biosource Patent Rights" means Patent Rights that cover Technology
which are Owned by Biosource, or licensed by Biosource from Third Parties or its
Affiliates, but only to the extent that transfer or sublicensing is permitted by
agreements with such Third Parties or Affiliates as of the Effective Date or
during the term of this Agreement. For the purposes of this Agreement, the
Patent Rights of Affiliates of Biosource shall be deemed to be Owned by
Biosource, where the Affiliate has granted to Biosource an interest in such
Patent Rights which allows Biosource to treat the Patent
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<PAGE> 6
Rights as it treats its own Patent Rights under this Agreement. Biosource Patent
Rights as of the Effective Date are set forth in Exhibit A.
1.11 "Biosource Product" means a Product in the Biosource Field the
discovery or development of which uses Discovery Technology Owned by DAS, or
Product Technology.
1.12 "Biosource Seed Products" shall have the meaning set forth in
Section 6.5.2.1 hereof.
1.13 "Confidential Information" means information, which is not subject
to an exception in Section 9.2, and relates to one or more of the following:
Annual Research Plan; Biosource Patent Rights; Biosource Product; DAS Patent
Rights; Development Candidate; Discovery Technology; Transient Transformation
Technology Improvements; Overall Research Plan; Product Technology; Production
Technology; TDCC Patent Rights; Technology; Transient Transformation Technology;
Viral Vector Technology; patent strategies; business strategies and
relationships; surveys; forecasts; marketing research; product concepts;
targets; product development processes; any other information and data which may
be made available by another party pursuant to this Agreement and deemed by the
disclosing party to be confidential.
1.14 "Contract Year" means each twelve (12) month period starting on (i)
the Effective Date in the case of the first Contract Year and (ii) the
anniversary of the Effective Date for each subsequent Contract Year.
1.15 "DAS Affiliates" means any corporation or other entity which DAS
directly or indirectly controls. A corporation or other entity shall be regarded
as being controlled by DAS if DAS owns or directly or indirectly controls more
than fifty percent (50%) of the outstanding voting stock or other ownership
interest of the other corporation or entity, or if DAS possesses, directly or
indirectly, the power to manage, direct or cause the direction of the management
and policies of the corporation or other entity or the power to elect or appoint
fifty percent (50%) or more of the members of the governing body of the
corporation or other entity. Any such other relationship as in fact results in
actual control over the management, business and affairs of a corporation or
other entity shall also be deemed to constitute control.
1.16 "DAS Patent Rights" means Patent Rights that cover Technology which
are Owned by DAS, or licensed by DAS from Third Parties or the DAS Affiliates
but only to the extent that transfer or sublicensing is permitted by agreements
with such Third Parties or DAS Affiliates, as of the Effective Date or during
the term of this Agreement. For the purposes of this Agreement, the Patent
Rights of a DAS Affiliate shall be deemed to be Owned by DAS, where such
Affiliate has granted to DAS an interest in such Patent Rights which allows DAS
to treat the Patent Rights as it treats its own under this Agreement. DAS Patent
Rights as of the Effective Date are set forth in
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<PAGE> 7
Schedule II.
1.17 "Demeter Genes" means any genes, nucleotide sequences, proteins or
fragments thereof which are discovered, designed, selected, identified or
modified using Demeter Technology during or prior to the term of the Research
Collaboration and are notified to Biosource by TDCC as "Demeter Genes" as
provided in Section 3.18.
1.18 "Demeter Technology" means (i) genes, nucleotide sequences, proteins
or fragments thereof which are Owned by Demeter Biotechnologies Ltd. or are
licensed to Mycogen by Demeter Biotechnologies Ltd.; and (ii) genes, nucleotide
sequences, proteins or fragments thereof, which are discovered or developed
using anti-microbial technology Owned by Demeter Biotechnologies Ltd. or
licensed to Mycogen, including that covered by U.S. Patent Nos. 5,597,946,
5,597,945; Australian Patent No. 611,859; Canadian Patent No. 1,321,157;
European Patent No. 0 330 655; and Application Nos. U.S. 08/444,762, U.S.
08/453,436; Japanese SHO 62-504491; European 89900103.6 and 93113536.2; or any
provisional, continuation, divisional or continuation-in-part applications; as
well as any patents issued thereon and any reissue or reexamination of such
patents; and patent applications filed in and patents issued by countries other
than the United States and patents of additions and other counterparts of
patents and patent applications in such countries.
1.19 "Discovery Technology" means Technology, Transient Transformation
Technology and Research Materials, including the use of Nicotiana, which is used
for the discovery, design, selection, identification or modification of
nucleotide sequence function, and any improvements thereto discovered or
developed in the course of the Research Collaboration; provided, however, that
Discovery Technology shall not be considered to be Product Technology or
Production Technology.
1.20 "Event of Default" shall have the meanings set forth in Section 12.2
hereof.
1.21 "FDA" means the United States Food and Drug Administration, or the
foreign equivalent for the country in which a particular Product is offered for
sale.
1.22 "First Commercial Sale" of a Product means the first for profit sale
for use or consumption by the general public of a Product.
1.23 "Industrial Products" means all Products including, but not limited
to, synthetic fiber; cosmetics; industrial compounds; industrial antimicrobial
compounds; Nutraceuticals; vitamins; animal health Products; food; feed; natural
and synthetic fiber; chemicals and materials; provided, however, that
agrochemicals, seed, and products (lower case) in the Nicotiana Field and
products (lower case) in the
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Pharmaceutical Field shall not be considered Industrial Products. Industrial
Products may include Products subject to compliance with FDA or USDA
regulations, but do not include Products subject to registration under FDA or
USDA regulations in effect as of the Effective Date for the country in which the
Product is offered for sale, as interpreted by administrative and judicial
decisions, whenever made.
1.24 "Mycogen" means Mycogen Corporation, a California corporation.
1.25 "Net Sales" means the total of: (a) the gross invoice price for
Products sold by a party, less the reasonable and customary accrual-basis
deductions from such gross amounts for: (i) normal and customary trade, cash and
other discounts, allowances and credits; (ii) credits or allowances actually
granted for damaged goods, returns or rejections of Products, consistent with
such party's established policies, and government mandated retroactive price
reductions; and (iii) freight, postage, shipping, customs duties and insurance
charges which are included in the gross invoice amount; and (b) royalties paid
to Third Parties and, in the case of TDCC, to Biosource, and, in the case of
Biosource, to TDCC. In the case of a transfer of Products by: (x) Biosource or
one of its Affiliates to another Affiliate of Biosource; or (y) TDCC, one of its
Affiliates, DAS or a DAS Affiliate to another entity in this same group, Net
Sales shall be determined based on the invoiced sales price for Products upon
the initial transfer to a Third Party customer, less the deductions allowed
under this Section. Every other commercial use or disposition of Products by
Biosource, its Affiliates, TDCC, its Affiliates, DAS, or DAS Affiliates in
barter or other non-monetary commercial transactions, but excluding any sampling
of Products, shall be considered a sale of the Products at the weighted average
Net Sales price for such Products during the preceding quarter in the same
country.
1.26 "Nicotiana Field" means all uses of Nicotiana plants, plant cells,
seeds or seedlings (collectively "Nicotiana") in the Pharmaceutical Field or as
a production host. Nicotiana Field shall not include use of Nicotiana for
cigarettes, cigars, pipe tobacco, chewing tobacco and snuff, and seeds/seedlings
for the production thereof.
1.27 "Non-Agricultural Value-Added" means, in respect of Industrial
Products, as applicable: (a) (i) incremental Net Sales attributable to one or
more measurable Traits used in the production of such Products; (ii) less any
increase in the cost of manufacturing (including depreciation) attributable to
such Traits used in the production of such Products; (iii) less any increase in
selling, general, administrative, research and development costs attributable to
such Traits used in the production of such Products; and (iv) less the cost of
capital spent on assets deployed in the production of such Products; and (b) the
revenue received by a party from licensees or sublicensees which is attributable
to one or more measurable Traits used in the production of Products. Calculation
of Non-Agricultural Value-Added is more specifically described in Exhibit B.
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1.28 "Nutraceutical" means biological or chemical materials for use by
humans and animals which are sold accompanied by only nutritional (and not
medical) claims and therefore would not be subject to registration as a
pharmaceutical by the FDA in the country in which the material is offered for
sale under regulations in effect as of the Effective Date, as interpreted by
administrative and judicial decisions, whenever made.
1.29 "Other Inventions" means an invention developed or discovered solely
or jointly by the parties in the course of the Research Collaboration that is
not Discovery Technology, Product Technology, Production Technology, Viral
Vector Technology, Transient Transformation Technology, and does not use or
express Alliance Genes.
1.30 "Overall Research Plan" means the research plan to be agreed upon by
the Research Committee pursuant to Section 4.5.4 (a) and approved by the
Steering Committee pursuant to Section 4.6.4 (a) hereof. A summary of the
Overall Research Plan contemplated as of the Effective Date is set forth in
Schedule I.
1.31 "Owned" means owned or controlled by the person or entity to whom
ownership is attributed in the context, or licensed by such person or entity
from Third Parties or its Affiliates but only to the extent that transfer or
sublicensing is permitted by agreements with such Third Parties or Affiliates as
of the Effective Date or during the term of the Agreement. For the purposes of
this Agreement, unless stated otherwise, Technology of Affiliates shall be
deemed to be Owned by a person or entity, where the Affiliate has granted the
person or entity an interest in such Technology which allows such person or
entity to treat the Technology as a party treats its own Technology under this
Agreement.
1.32 "Patent Rights" means any United States patent application,
including provisionals, and any divisional, continuation, or
continuation-in-part of such patent application (to the extent the claims are
directed to subject matter specifically described therein), as well as any
patent issued thereon and any reissue or reexamination of such patent, and
patent applications filed in and patents issued by countries other than the
United States and patents of additions and other counterparts of patents and
patent applications in such countries.
1.33 "Pharmaceutical Field" means all uses and all biological materials
and chemical compounds active for the treatment, mitigation, diagnosis or
prevention of disease states and conditions in humans and animals; provided,
however, that the Pharmaceutical Field shall include active material and
compounds for animal uses only which are: (i) Products that are subject to
registration under FDA or USDA regulations in effect as of the Effective Date
for the country in which a particular Product is offered for sale, as
interpreted by administrative and judicial decisions, whenever made, and (ii)
antimicrobial peptide products; and provided, further, that the Pharmaceutical
Field
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shall not include Nutraceuticals nor animal feed Products (other than an animal
feed Product which itself is used as an oral vaccine) that is not subject to
registration under FDA or USDA regulations in effect as of the Effective Date
for the country in which a particular Product is offered for sale, as
interpreted by administrative and judicial decisions, whenever made.
1.34 "Product" means any seed; seedling; plant; plant cell; agrochemical;
industrial chemical; vitamin; Nutraceutical; feed; food; natural or synthetic
fiber; pharmaceutical; animal health products; product, compound, substance or
composition related to or made from plants or produced by microorganisms or
other means; or for the treatment of plants; and which incorporates or is
produced utilizing Product Technology.
1.35 "Product Technology" means (i) Alliance Genes, and protein, protein
fragments, and amino acids sequences encoded therefrom, useful for producing
Products, which are discovered, developed, designed, selected, identified or
modified in the course of the Research Collaboration; or (ii) genes or any
nucleotide sequence or fragment thereof that encodes for a Trait in plants,
either alone or in conjunction with other encoding sequences, and including
antisense or co-suppression use thereof, and protein, protein fragments and
amino acid sequences encoded therefrom, which are discovered, developed,
designed, selected, identified or modified after the end of the Research
Collaboration by TDCC or its permitted sublicensees through the use of Discovery
Technology, or improvements thereon, Owned by Biosource and licensed to TDCC
hereunder. Product Technology does not include: (a) genes, nucleotide sequences,
proteins or fragments thereof discovered, designed, selected, identified or
modified using Demeter Technology; or (b) genes, nucleotide sequences or
fragments thereof of Photorhabdus, Xenorhabdus, Bacillus thuringiensis, and
Saccharopolyspora spinosa which are discovered, designed, selected, identified
or modified using Discovery Technology Owned by Biosource or Transient
Transformation Technology Owned by Biosource. Product Technology shall not be
considered to be Discovery Technology, Production Technology or Transient
Transformation Technology.
1.36 "Production Technology" means Technology (including, but not limited
to, promoters, introns, selectable markers, 3' ends, and nucleotide sequences
and fragments thereof for transformation and expression of genes in plants) and
Research Material, in each case, useful for the development, selection or
manufacture of any plant, plant cell, seed, seedling, plant variety, or hybrid;
and any improvements thereto discovered or developed in the course of the
Research Collaboration; provided, however, that Production Technology shall not
be considered to be Product Technology, Discovery Technology or Transient
Transformation Technology.
1.37 "Provider" shall have the meaning set forth in Section 8.1.
1.38 "Recipient" shall have the meaning set forth in Section 8.1.
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1.39 "Research Collaboration" means the work to be performed by
Biosource, TDCC and/or DAS pursuant to terms of this Agreement in accordance
with the Overall Research Plan and each Annual Research Plan to determine the
function of nucleotide sequences causing Traits in vascular plants. The first
day of the Research Collaboration shall be the Effective Date and it will
continue until terminated pursuant to Article 12.
1.40 "Research Materials" means, biological materials useful in the
Research Collaboration, including but not limited to, plasmids; vectors; cDNA,
proteins, nucleotide sequences, amino acid sequences, and in each case fragments
thereof; and infective RNA; and libraries containing the same.
1.41 "Research Services" means the research services provided by
Biosource to TDCC and DAS under the Overall Research Plan and each Annual
Research Plan.
1.42 "TDCC Agricultural Cumulative Investment" means the total cumulative
amount of: (i) all expenses incurred and capital dedicated by TDCC, its
Affiliates, DAS and the DAS Affiliates during the term of this Agreement
(including, but not limited to internal expenses and capital, all payments to
Biosource under this Agreement, and amounts paid to Third Parties for research
or other services), to support the discovery, development, commercialization and
manufacture of TDCC Products comprising agrochemicals or seed; (ii) reduced by
the cumulative Agricultural Value-Added by distinct Traits derived from one or
more Alliance Genes in TDCC Products that constitute agrochemicals and seed; and
(iii) the remainder compounded on an annual basis by the TDCC Cost of Capital.
1.43 "TDCC Cost of Capital" means, as of the Effective Date, ten and
75/100 percent (10.75%); provided, however, that thereafter the TDCC Cost of
Capital shall be reviewed annually and adjusted, up or down, effective as of the
first day of the following calendar year, to reflect an increase or decrease of
more than one percent (1%) in TDCC's weighted average cost of capital in the
preceding calendar year, as determined and used by TDCC in its financial
planning. TDCC shall notify Biosource of any change in the TDCC Cost of Capital.
1.44 "TDCC Crops" means all plants (including Nicotiana as a plant and
not a production host) other than (i) Biosource Crops, subject however to
Section 3.9, or (ii) Nicotiana as used in the Nicotiana Field.
1.45 "TDCC Field" means (i) all uses of TDCC Crops, for seed, seedlings,
plants, plant cells, agrochemicals, Industrial Products, vitamins,
Nutraceuticals, feed, food, fiber uses, and animal health Products, where animal
health Products are limited to Products that are subject to the United States
Environmental Protection Agency regulations and/or compliance with, but not
registration under, FDA or USDA regulations in effect as of the Effective Date
for the country in which the Product is
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offered for sale, as interpreted by administrative and judicial decisions,
whenever made, and exclude animal health Products in the Pharmaceutical Field;
(ii) the use of Product Technology in TDCC Crops; and (iii) the use of Product
Technology and Production Technology for the production of Products; provided,
however, that the TDCC Field shall not be considered to include uses in the
Biosource Field.
1.46 "TDCC Industrial Cumulative Investment" means the total cumulative
amount: (i) of all expenses and capital dedicated by TDCC, its Affiliates, DAS
and the DAS Affiliates during the term of this Agreement (including, but not
limited to internal expenses and capital, all payments to Biosource under this
Agreement, and amounts paid to Third Parties for research or other services), to
the discovery, development, commercialization and/or manufacture of TDCC
Products that constitute Industrial Products and all other Products not captured
in the definition of Agricultural Cumulative Investment; (ii) reduced by the
cumulative Non-Agricultural Value-Added by distinct Traits derived from one or
more Alliance Genes in such TDCC Products; and (iii) the remainder compounded on
an annual basis by the TDCC Cost of Capital.
1.47 "TDCC Patent Rights" means Patent Rights that cover Technology which
are Owned by TDCC, or licensed by TDCC from Third Parties or its Affiliates but
only to the extent that transfer or sublicensing is permitted by agreements with
such Third Parties or Affiliates as of the Effective Date or during the term of
this Agreement. For the purposes of this Agreement, the Patent Rights of
Affiliates of TDCC shall be deemed to be Owned by TDCC, where the Affiliate has
granted to TDCC an interest in such Patent Rights which allows TDCC to treat the
Patent Rights as it treats its own under this Agreement. TDCC Patent Rights as
of the Effective Date are set forth in Schedule III.
1.48 "TDCC Product" means a Product in the TDCC Field the discovery or
development of which uses Discovery Technology Owned by Biosource or Product
Technology.
1.49 "TDCC Seed Product" shall have the meaning set forth in Section
6.4.2.2.
1.50 "Technology" means any development, idea, design, concept,
technique, process, invention, nucleotide sequence, protein, protein fragment,
discovery, procedure, technical information, know-how, data, nucleotide sequence
data, data base, biological material, robotics, software, bioinformation,
formula, expertise, methods, systems, programs, or trade secrets whether or not
patentable, which relate to the Biosource Field, TDCC Field, other fields of use
of Alliance Genes as described in Section 3.6 and/or Other Inventions.
1.51 "Third Party" or "Third Parties" means any entity or entities other
than Biosource, its Affiliates, TDCC, its Affiliates, DAS and the DAS
Affiliates.
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1.52 "Title 11" has the meaning set forth in Section 13.1.
1.53 "Trait" means any detectable, phenotypic property of a plant
including altered phenotypic properties detected in a vascular plant, caused by
one or more nucleotide sequences.
1.54 "Transient Transformation Technology" means (i) all Research
Materials and other Technology useful for the enhancement or enablement of
transient gene expression; (ii) any use or application of Viral Vector
Technology; and (iii) any improvements discovered thereto in the course of the
Research Collaboration; provided, however, Transient Transformation Technology
shall not be considered to be Product Technology or Production Technology.
1.55 "Transient Transformation Technology Improvements" means an
improvement, enhancement and/or modification to Transient Transformation
Technology Owned by Biosource or its Affiliates.
1.56 "USDA" means the United Stated Department of Agriculture, or the
foreign equivalent for the country in which any Product is offered for sale.
1.57 "Valid Claim" means a claim of a patent application or a patent
which has not been held and no equivalent of which has been held permanently
revoked, unenforceable or invalid by a final decision of a court or other
governmental agency of competent jurisdiction in any country.
1.58 "Viral Vector Technology" means all Technology Owned by Biosource
contained in Biosource Patents Rights, as more fully described in Exhibit A,
know-how, Research Material and other Technology Owned by Biosource related to
such Patent Rights, and any improvements thereto.
2. SCOPE AND STRUCTURE OF THE COLLABORATION
2.1 General. Biosource, TDCC and DAS wish to enter into a collaborative
research program to determine the function of nucleotide sequences causing
Traits in TDCC Crops and develop Products based upon such Traits, as well as
expression of Products in microorganisms and genetically altered microorganisms.
During the term of the Research Collaboration: (i) TDCC shall fund specified
research in accordance with the Overall Research Plan and Annual Research Plans;
(ii) Biosource shall provide agreed Research Services and grant to TDCC
exclusive rights in the TDCC Field to use Discovery Technology Owned by
Biosource for TDCC Products; and (iii) DAS shall participate in the Research
Collaboration in consideration of rights DAS is to be granted by TDCC under
terms of a separate written agreement to develop, use, have used, make, have
made, distribute for sale, sell, offer to sell, use, practice, import and export
specified TDCC Products; all as more specifically described hereinafter.
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2.2 Other Collaborations. Biosource agrees that, during the term of the
Research Collaboration, it will not enter into nor allow its Affiliates to enter
into, any collaboration in the TDCC Field with a Third Party without the written
approval of TDCC. TDCC and DAS acknowledge that Biosource is currently engaged
in certain cooperative research with Third Parties related to Transient
Transformation Technology, which research is outside the TDCC Field.
3. GRANTS OF RIGHTS
3.1 Grants of Discovery Technology Rights to TDCC. Subject to the terms
and conditions of this Agreement, Biosource hereby grants to TDCC and TDCC
accepts worldwide rights in the TDCC Field, with such rights during the term of
the Research Collaboration being exclusive and including the right to grant
sublicenses during the term of the Research Collaboration, to Discovery
Technology Owned by Biosource, and Biosource Patent Rights covering same to
discover and develop TDCC Products or Product Technology. From and after the
expiration of the Research Collaboration, the rights granted to TDCC in the TDCC
Field as set forth in this Section 3.1 to Discovery Technology Owned by
Biosource and related Biosource Patent Rights shall thereafter continue but will
be perpetual, non-exclusive, except for uses in the discovery of genes or
fragments thereof from Photorhabdus, Xenorhabdus, Bacillus thuringiensis, and
Saccharopolyspora spinosa and Demeter Genes which rights shall continue to be
exclusive even after the expiration of the Research Collaboration, and
worldwide; provided, however, that any TDCC Product discovered or developed by
exercise of such rights shall be subject to the milestone and royalty provisions
of Article 6. Once the rights become non-exclusive, TDCC may not thereafter
grant sublicenses in such Discovery Technology rights to a Third Party, except
that the rights and obligations of any sublicenses granted during the Research
Collaboration shall continue and TDCC may also thereafter sublicense its
Affiliates, DAS and DAS Affiliates, and TDCC and parties licensed or sublicensed
by TDCC may use Third Party contract services in the exercise of the rights
granted in this Section 3.1.
3.2 Grant of Production Technology Rights to TDCC. Subject to the terms
and conditions of this Agreement, Biosource hereby grants to TDCC and TDCC
accepts worldwide rights in the TDCC Field, with such rights during the term of
the Research Collaboration being exclusive and including the right to sublicense
during the term of the Research Collaboration, to Production Technology Owned by
Biosource and Biosource Patent Rights covering same, to develop, have developed,
use, have used, make, have made, distribute for sale, sell, offer to sell,
practice, import and export TDCC Products or Production Technology. From and
after the expiration of the Research Collaboration, the rights granted to TDCC
in the TDCC Field to Production Technology Owned by Biosource in the TDCC Field
and related Biosource Patent Rights as set forth in this Section 3.2 shall
thereafter continue but will be perpetual, non-exclusive, except for uses of
Production Technology for inoculation or introduction of genes or fragments
thereof from Photorhabdus, Xenorhabdus, Bacillus thuringiensis,
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and Saccharopolyspora spinosa and Demeter Genes into monocot and dicot plants
which rights shall continue to be exclusive even after the expiration of the
Research Collaboration, royalty-free and worldwide. Once the rights become
non-exclusive, TDCC may not thereafter grant sublicenses in such Production
Technology rights to a Third Party, except that the rights and obligations of
any sublicenses granted during the Research Collaboration shall continue and
TDCC may also thereafter sublicense its Affiliates, DAS and DAS Affiliates, and
TDCC and parties licensed or sublicensed by TDCC may use Third Party contract
services in the exercise of the rights granted in this Section 3.2.
3.3 Grant of Product Technology to TDCC. Subject to the terms and
conditions of this Agreement, Biosource hereby grants to TDCC and TDCC accepts
exclusive, worldwide rights in the TDCC Field, with the right to sublicense, to
Product Technology Owned by Biosource, and Biosource Patent Rights covering
same, to develop, have developed, use, have used, make, have made, distribute
for sale, sell, offer to sell, practice, import and export TDCC Products during
the term of the Research Collaboration. From and after the expiration of the
Research Collaboration, the rights granted to TDCC in the TDCC Field to Product
Technology Owned by Biosource and related Biosource Patent Rights as set forth
in this Section 3.3 shall be perpetual, worldwide and exclusive in the TDCC
Field, with the right to sublicense any entity; provided, however, that any TDCC
Product developed, discovered or manufactured pursuant to such exclusive license
shall be subject to the milestone and royalty provisions of Article 6.
3.4 Grant of Production Technology Rights to Biosource. Subject to the
terms and conditions of this Agreement: (i) DAS hereby grants to Biosource and
Biosource accepts non-exclusive, worldwide rights, in the Biosource Field,
without the right to sublicense except to Biosource Affiliates and as set forth
in clause (b) below, to Production Technology Owned by DAS as set forth on
Schedule II, and DAS Patent Rights covering same; and (ii) TDCC hereby grants to
Biosource and Biosource accepts non-exclusive, worldwide rights in the Biosource
Field, without the right to sublicense except to Biosource Affiliates and as set
forth in clause (b) below, to Production Technology Owned by TDCC which is
discovered or developed in the course of the Research Collaboration and TDCC
Patent Rights covering same; in each case so that Biosource may develop, have
developed, make, have made, use, have used, distribute for sale, sell, offer to
sell, practice, import and export products (lower case); provided, however,
that: (a) the licenses granted under this Section 3.4 to Production Technology
shall be limited to (x) uses in the Pharmaceutical Field, and (y) in the case of
the Nicotiana Field, but outside the Pharmaceutical Field, uses of Production
Technology to enhance Nicotiana as a production host for Products or products
(lower case) that are outside the defined scope of TDCC Crops and TDCC Products,
and uses outside the Pharmaceutical Field which do not compete with those in the
TDCC Field, and (b) Biosource may sublicense to any entity Production Technology
Owned by TDCC or DAS solely when the Production Technology is in a transgenic
plant or seed but no
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<PAGE> 16
license is granted under this Section 3.4 to use or sublicense use of the target
gene to encode for a TDCC Product or products (lower case) the use of which
competes with those of TDCC, its Affiliates, DAS, DAS Affiliates or permitted
sublicensees in the TDCC Field. Except as provided in clause (b) above,
Biosource may not sublicense such rights to a Third Party, but Biosource may
sublicense its Affiliates and may use Third Party contract services in the
exercise of the rights granted in this Section 3.4.
3.5 Grant of Product Technology Rights to Biosource. Subject to the
terms and conditions of this Agreement, TDCC hereby grants to Biosource and
Biosource accepts exclusive, worldwide rights in the Biosource Field, with right
to sublicense, to Product Technology Owned by TDCC which is discovered and
developed in the course of the Research Collaboration and TDCC Patent Rights
covering same, to develop, have developed, use, have used, make, have made,
distribute for sale, sell, offer to sell, practice, import and export Products;
provided, however, that the rights granted under this Section 3.5 to Product
Technology shall be limited to: (x) uses in the Pharmaceutical Field, and (y) in
the case of the Nicotiana Field, but outside the Pharmaceutical Field, uses of
Product Technology to enhance Nicotiana as a production host for Products that
are outside the defined scope of TDCC Crops and TDCC Products, and uses outside
the Pharmaceutical Field which do not compete with those in the TDCC Field. From
and after the expiration of the Research Collaboration, the rights set forth in
this Section 3.5 with respect to Product Technology Owned by TDCC and related
TDCC Patent Rights shall thereafter continue but will be perpetual, exclusive
and worldwide in the Biosource Field, and include the right to sublicense any
entity; provided, however, that any Biosource Product discovered, developed or
manufactured by exercise of such exclusive rights, other than Biosource Products
to be used in the Pharmaceutical Field or in the Nicotiana Field, shall be
subject to the royalty provisions of Article 6.
3.6 Other Fields of Use of Alliance Genes. Biosource hereby grants to
TDCC and TDCC accepts exclusive, perpetual, royalty-bearing worldwide rights,
with the right to sublicense any entity, in any fields of use of Alliance Genes,
other than those in the Pharmaceutical Field, the Nicotiana Field, the TDCC
Field and in Biosource Crops, to develop, have developed, use, have used, make,
have made, distribute for sale, sell, offer to sell, practice, import and export
products (lower case) and services. TDCC and Biosource shall enter into good
faith negotiations when such other uses are identified to determine a royalty
rate and other license terms taking into account the value of the opportunity
and the risk and investment involved.
3.7 Technology from TDCC. Except as specifically provided in Sections
3.4 and 3.5, during the term of the Research Collaboration and thereafter,
neither TDCC nor DAS are obligated to provide Biosource with any Technology to
use in the Research Collaboration or otherwise. TDCC and DAS will not provide
other Technology for use by Biosource in the Research Collaboration, until
Biosource, TDCC and DAS shall have consulted as appropriate to clarify the
rights and obligations
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of Biosource. If it is determined that Biosource does not have rights under
Sections 3.4 or 3.5 to use Technology which is of interest to Biosource, TDCC or
DAS, whichever owns the Technology, may at its sole discretion propose to
Biosource an offer in writing of terms and conditions for grant of a right to
use such Technology. Biosource shall have thirty (30) days to provide written
notice to the offeror of its acceptance of the offer, unless otherwise stated in
the offer or agreed to in writing. If the offeror does not receive written
notice from Biosource on or before the close of the period during which the
offer is open for acceptance agreeing to the terms of such offer, the offer
shall be considered withdrawn and Biosource shall have no right to use such
other Technology. If other Technology Owned by TDCC or DAS is provided to
Biosource in the course of the Research Collaboration without consultation as
provided above, then Biosource shall have a perpetual, non-sublicensible,
non-exclusive, worldwide right to use such Technology in the Biosource Field to
develop, have developed, make, have made, use, have used, distribute for sale,
sell, offer to sell, practice, import and export Products, with such right to be
royalty-free except as provided in Section 3.5. Notwithstanding the foregoing,
any rights granted under this Section 3.7 shall be limited to: (x) uses in the
Pharmaceutical Field, and (y) in the case of the Nicotiana Field, but outside
the Pharmaceutical Field, uses of Production Technology to enhance Nicotiana as
a production host for Products that are outside the defined scope of TDCC Crops
and TDCC Products and uses outside the Pharmaceutical Field which do not compete
with those in the TDCC Field. No rights are granted by this Section 3.4 in any
technology (lower case) which is not Owned by TDCC or DAS nor in Transient
Transformation Technology or viral vector technology (lower case) developed or
discovered by TDCC or DAS independent of the Viral Vector Technology.
3.8 Offer of Rights.
3.8.1 [*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 18
[*]
3.8.2 [*]
3.8.3 [*]
3.9 Option to Biosource Crops. TDCC shall have an option, exercisable
by: (i) written notice delivered to Biosource within twelve (12) months of the
Effective Date, to expand the definition of TDCC Crops to include Biosource
Crops; and (ii) payment to Biosource of [*] ([*] U.S. dollars) by TDCC either
concurrent with or reasonably promptly after such notice. Notwithstanding the
foregoing, if the milestones described in Exhibit C have not been fully achieved
by Biosource by the end of the first Contract Year during the Research
Collaboration, TDCC's option to incorporate the Biosource Crops into the TDCC
Crops shall continue
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 19
for twenty-four months from the Effective Date. If TDCC exercises the option
under this Section 3.9, the Biosource Crops shall become exclusively part of the
TDCC Crops and shall be removed from the Biosource Field for all purposes under
this Agreement. In the event TDCC does not timely exercise the option including
payment for same, Biosource shall retain all rights to the Biosource Crops
granted pursuant to this Agreement.
3.10 No Grant of Other Technology or Patent Rights. Except as otherwise
expressly provided in this Agreement, under no circumstances shall a party
hereto, as a result of this Agreement, obtain any ownership interest in or other
right to any technology, intellectual property or Patent Rights of the other
party, including items owned, controlled or developed by the other party, or
transferred by the other party to said party. For avoidance of doubt, nothing in
this Agreement shall be construed to transfer any right or interest in any
technology, intellectual property rights or Patent Rights in which Mycogen has
or shall have an ownership interest without the prior written consent of
Mycogen.
3.11 Nontransferable. Except as expressly provided in this Agreement, the
rights and obligations granted hereunder shall be nontransferable without the
written consent of the party granting such license.
3.12 Database and Library Rights. The Parties acknowledge and agree that:
(i) Biosource Discovery Technology licensed under Section 3.1 may comprise
databases and libraries of biological materials or chemical compounds; and (ii)
the scope of rights granted to TDCC pursuant to Section 3.1 with respect to TDCC
Products shall include Products that are developed through the use of such
databases and/or comprise or are derived from biological materials or chemical
compounds contained in such databases or libraries. TDCC and DAS shall not have
the right to distribute for sale, sell or offer to sell, Research Materials or
chemicals contained in such databases or libraries of Biosource, except in the
exercise of rights granted under terms of this Agreement, nor use in the
Biosource Field such Research Materials, chemicals, databases and/or libraries.
The Parties acknowledge and agree that: (a) TDCC or DAS may provide Biosource
with Research Materials or chemical compounds contained in databases and
libraries in the course of the Research Collaboration; and (b) Biosource shall
not have the right to distribute for sale, sell or offer to sell Research
Materials or chemicals contained in such databases or libraries of TDCC or DAS,
except in the exercise of rights granted under terms of this Agreement, nor use
in the TDCC Field such Research Materials, chemicals, databases and/or
libraries. After the termination of the Research Collaboration, there is no
obligation under terms of this Agreement for a party to provide continuing
access to Research Materials Owned by such party.
3.13 After Termination of the Research Collaboration.
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3.13.1 [*]
3.13.2 [*]
3.13.3 [*]
3.14 Different Categories of Technology. Discovery Technology, Product
Technology and Production Technology are each defined to encompass mutually
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 21
exclusive subject matter. Schedule IV presents examples of Technology within
each category as an aid to interpretation. The examples in Schedule IV are for
illustrative purposes only and shall not evidence the intent of the parties in a
particular factual situation not expressly stated therein. The Research
Committee, created in Section 4.5, shall provide additional exemplification as
deemed useful. Schedule IV and additional exemplification by the Research
Committee shall be considered in resolution of any dispute as to the relative
scope of Discovery Technology, Product Technology and Production Technology.
3.15 TDCC Sublicenses. Any of the rights which TDCC sublicenses to
Affiliates, DAS, DAS Affiliates in Sections 3.1, 3.2, 3.3, 3.6, 3.8.1, 3.8.2,
3.9 and 3.13.2 may be further sublicensed by such sublicensees to Third Parties
to the same extent as TDCC is free to sublicense such Third Parties.
3.16 Covenant Not to Sue. TDCC and DAS each agree that it shall not bring
any suit or legal proceeding against Biosource for infringement of Patent Rights
Owned by TDCC or DAS as of the Effective Date due to a use by Biosource of
Transient Transformation Technology Owned by Biosource for: (i) uses in the
Pharmaceutical Field; (ii) in the case of the Nicotiana Field, but outside the
Pharmaceutical Field, uses to enhance Nicotiana as a production host for
Products that are outside the defined scope of TDCC Crops and TDCC Products, and
uses outside the Pharmaceutical Field which do not compete with those in the
TDCC Field; and (iii) use by Biosource in the course of the Research
Collaboration. Any entity in which more than fifty percent (50%) of the equity
interest is owned or directly or indirectly controlled by TDCC, which is
sublicensed Discovery Technology Owned by Biosource, as is permitted in Section
3.1, or granted an assignment of rights by TDCC to use Discovery Technology
Owned by Biosource, as is permitted under Section 14.2, shall be required as a
condition of such sublicense or assignment to agree not to bring any suit or
legal proceeding against Biosource for infringement of Patent Rights Owned by
the sublicensee or by the assignee in the circumstances in which TDCC and DAS
have agreed in this Section 3.16 not to bring suit. Nothing in this Section 3.16
shall be construed to obligate TDCC or DAS not to bring any suit or legal
proceeding against a permitted sublicensee, assignee or a successor in interest
of Biosource.
3.17 Rights in Respective Fields. The grants in this Article 3 shall be
construed consistent with the principles that, unless expressly provided: (i)
the grant of rights to TDCC does not include uses of Products in the
Pharmaceutical Field or Nicotiana Field nor uses of Transient Transformation
Technology Owned by Biosource other than uses permitted pursuant to Sections
3.1, 3.13.1 or 3.13.3; and (ii) the grant of rights to Biosource does not
include uses in the TDCC Field nor any use with Photorhabdus, Xenorhabdus,
Bacillus thuringiensis, and Saccharopolyspora spinosa or Demeter Genes. However,
nothing herein shall be construed to preclude manufacture, sale or use by TDCC,
its permitted sublicensees or its customers of a Product in the TDCC Field
together with a pharmaceutical composition, which is not a Product. For
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example, TDCC is free to make, use and sell a feed Product in a blend with
conventional pharmaceutical products (lower case). Further, nothing herein shall
be construed to preclude manufacture, sale or use by TDCC of an Industrial
Product or TDCC Seed Product which requires compliance with FDA or USDA
regulations, but is not subject to registration under FDA or USDA regulations in
effect as of the Effective Date for the country in which a particular Product is
offered for sale, as interpreted by administrative and judicial decisions,
whenever made.
3.18 Rights with respect to Demeter Genes. Rights and obligations as to
specific Demeter Genes under this Article 3 shall only arise after notification
to Biosource by TDCC in writing of specific Demeter Genes with the final
notification to be made reasonably promptly following the end of the Research
Collaboration. Exclusive rights granted to TDCC under Sections 3.1, 3.2, 3.8.3
and 3.13.3 with respect to any Demeter Genes upon notification of same shall be
subject to prior rights properly granted by Biosource to a Third Party with
respect to use of Discovery Technology, Production Technology or improvements in
Transient Transformation Technology.
4. CONDUCT OF PARTIES DURING THE RESEARCH COLLABORATION
4.1 Obligations of the Parties.
4.1.1 Reasonable Efforts. Each of the parties agrees to use its
commercially reasonable efforts to achieve the objectives of the Research
Collaboration and to perform its obligations under the Overall Research Plan and
each Annual Research Plan in a timely manner. Until the Overall Research Plan
and the Annual Research Plan for the applicable Contract Year are approved by
the Steering Committee as provided herein, the parties shall in good faith
proceed as outlined in the summary of the Overall Research Plan and Annual
Research Plan for the first Contract Year, as set forth in Schedule I hereto.
4.1.2 Deliveries by Biosource and TDCC and DAS. During the term of the
Research Collaboration and subject to the rights granted hereunder, Biosource
will timely disclose to TDCC and DAS, the Discovery Technology, Production
Technology, and Product Technology that is Owned by Biosource as is reasonably
required to perform the work in accordance with the Overall Research Plan and
Annual Research Plans. In particular, within sixty (60) days of the Effective
Date, Biosource shall disclose to TDCC the information listed in Schedule VI.
During the term of the Research Collaboration and subject to the rights granted
hereunder, DAS will timely disclose to Biosource the Production Technology and
Product Technology Owned by DAS as defined in Schedule I, and TDCC will deliver
Product Technology that is Owned by TDCC, as is reasonably required to perform
the work in accordance the Overall Research Plan and Annual Research Plans.
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4.2 Access to Data, Information Exchange and Reports. Each party will
have reasonable access to raw data of the other parties generated in the course
of the Research Collaboration including, but not limited to, screening results,
comparative sequence data, gene expression and protein expression data,
molecular genetic methodologies and technologies, protein purification data and
biochemical assay data. Any disagreement as to whether such access is
appropriate in respect of specific information sought by a party pursuant to
this Section 4.2 shall be referred to the Research Committee for determination.
During the term of the Research Collaboration, each party on a quarterly basis
shall provide the other parties with a written report describing the reporting
party's progress with respect to the Research Collaboration and development of
Products by the reporting party or sublicensees which utilize or are enabled by
Technology developed or discovered in the course of the Research Collaboration.
In addition, TDCC and DAS shall have the right to have representatives monitor
any and all work by Biosource related to the Research Collaboration.
4.3 Term of Research Collaboration. Except as otherwise provided in
Section 12.1, the term of the Research Collaboration shall continue for a term
of three (3) Contract Years. During each Contract Year, Biosource will provide
the required scientist man-years of effort for the Research Collaboration in
accordance with the applicable Annual Research Plan. Any number of scientist
man-years of effort dedicated to the Research Collaboration in excess of the
maximum or below the minimum with respect to the Annual Research Plan for a
given Contract Year shall be subject to the approval of the Research Committee.
4.4 Availability of Employees. Each party agrees to make its employees
involved in the Research Collaboration reasonably available during normal
business hours at their places of employment to consult on issues arising during
the course of the Research Collaboration.
4.5 Research Committee.
4.5.1 Creation of Research Committee. The parties hereby create a Research
Committee which shall continue for the duration of the Research Collaboration
and which shall consist of four (4) members, two (2) of which shall be
designated by TDCC and two (2) of which shall be designated by Biosource. The
initial members of the Research Committee designated by Biosource are Guy
della-Cioppa and David McGee and designated by TDCC are Katherine Armstrong and
W.H. (Kerr) Anderson. If any member of the Research Committee dies, resigns, or
becomes incapacitated, the party which designated such member shall designate
his or her successor (whose term shall commence immediately), and any party may
withdraw the designation of any of its members of the Research Committee and
designate a replacement (whose term shall commence immediately) at any time by
giving notice of the withdrawal and replacement to the other party. The
chairperson of the Research Committee shall be designated annually for each
calendar year during the Research Collaboration on an alternating
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basis between Biosource and TDCC. The member party not designating the
chairperson shall designate one of its representatives as secretary to the
Research Committee for such year.
4.5.2 Meetings of the Research Committee. Regular meetings of the Research
Committee during the term of the Research Collaboration shall be held within
forty-five (45) days after the end of each calendar quarter at such times and
places as the members of the Research Committee shall from time to time agree.
Special meetings of the Research Committee may be called by Biosource or TDCC on
ten (10) days written notice to the other member party unless notice is waived
by the member parties. All meetings shall alternate between the offices of TDCC
and Biosource unless the member parties otherwise agree. The chairperson shall
be responsible for sending notice of meetings to all members. In the event a
Research Committee member is unable to attend a meeting of the Research
Committee, such Research Committee member may designate an alternate member who
will serve solely for that Research Committee meeting.
4.5.3 Decisions of Research Committee. A quorum of the Research Committee
shall be present at any meeting of the Research Committee if at least one
representative of each member party is present at such meeting in person or by
telephone. If a quorum exists at any meeting, the unanimous consent of all
members of the Research Committee present at such meeting is required to take
any action on behalf of the Research Committee. Neither member party shall act
or purport to act on behalf of the other member party.
4.5.4 Responsibilities of Research Committee. The Research Committee shall
be responsible for the conduct and progress of the Research Collaboration
activities, including, without limitation:
(a) within sixty (60) days after the Effective Date, developing
based upon the summary set forth in Schedule I, the Overall
Research Plan for the research and development to be conducted
by the parties during the term of the Research Collaboration,
which plan shall establish (i) the scope of the Research
Collaboration; (ii) the research objectives, work plan
activities and time schedules with respect to identification
of novel and essential plant traits and genomic targets; and
(iii) the responsibilities of each party with respect to the
work to be performed under the Research Collaboration. The
members of the Research Committee designated by Biosource
shall not unreasonably withhold approval of an Overall
Research Plan satisfactory to TDCC, which is consistent with
the summary in Schedule I. The Overall Research Plan may be
revised and updated from time to time as unanimously agreed
upon by the Research Committee;
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(b) within sixty (60) days after the Effective Date, developing
based upon the summary set forth in Schedule I, a written plan
and budget for the specific activities to be conducted in
connection with the Research Collaboration during the
remainder of the first Contract Year (i.e., the "Annual
Research Plan"). Thereafter, by April 1 of each Contract Year
during the term of the Research Collaboration beginning with
April 1, 1999, Biosource shall submit to the Research
Committee a written proposed Annual Research Plan for the
following Contract Year consistent with the Overall Research
Plan. The Research Committee shall review each such proposal
as soon as practicable, and make such revisions to the
proposal as are appropriate to achieve the objectives and
schedule of the Overall Research Plan. The Research Committee
shall submit to the Steering Committee for approval no later
than June 1 of such year the final proposed Annual Research
Plan for the next succeeding Contract Year;
(c) coordinating all technical aspects of the Research
Collaboration;
(d) reporting to the Steering Committee on the achievement of the
milestones established pursuant to Section 6.2(a) ; and
(e) adopt standards and guidelines to ensure that the parties and
those working on research and development activities in
furtherance of this Agreement keep and maintain appropriate
laboratory notebooks and other records of their activities.
4.5.5 Research Committee Reports. Within ten (10) days following each
meeting of the Research Committee held pursuant to Section 4.5.2, the secretary
of the Research Committee shall prepare and send to each party a written report
of actions taken at the meeting in such form and containing such detail as shall
be determined by the Research Committee.
4.5.6 Deadlock. In the event that the Research Committee cannot reach
agreement with respect to any matter that is subject to its decision-making
authority, then the matter shall be referred to the Steering Committee for
resolution.
4.6 Steering Committee.
4.6.1 Creation of Steering Committee. The parties hereby also create a
Steering Committee which shall remain in effect for the duration of the Research
Collaboration and which shall consist of six (6) members, three (3) of which
shall be designated by TDCC and three (3) of which shall be designated by
Biosource. The initial members of the Steering Committee designated by Biosource
are John W. Maki, Robert L. Erwin and John J. O"Malley, and designated by TDCC
are Bill Tolbert,
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Ronald Meeusen and William Dowd. If any member of the Steering Committee dies,
resigns, or becomes incapacitated, the member party which designated such member
shall designate his or her successor (whose term shall commence immediately),
and either member party may withdraw the designation of any of its members of
the Steering Committee and designate a replacement (whose term shall commence
immediately) at any time by giving notice of the withdrawal and replacement to
the other member party. The chairperson of the Steering Committee shall be
designated annually for each Contract Year on an alternating basis between
Biosource and TDCC. Biosource and TDCC shall alternate the appointment of the
secretary of the Steering Committee in the Contract Years in which they do not
have the right to designate the chairperson.
4.6.2 Meetings of the Steering Committee. Regular meetings of the Steering
Committee shall be held prior to October 31 of each Contract Year at such times
and places as the members of the Steering Committee shall from time to time
agree. Special meetings of the Steering Committee may be called by either member
party on fifteen (15) days written notice to the other party unless notice is
waived by the parties. All meetings shall alternate between the offices of
Biosource and TDCC unless the member parties otherwise agree. In the event a
Steering Committee member is unable to attend a meeting of the Steering
Committee, such Steering Committee member may designate an alternate member who
will serve solely for that Steering Committee meeting.
4.6.3 Decisions of the Steering Committee. Unless otherwise specifically
designated as a responsibility of the Research Committee pursuant to Section
4.5.4, all decisions regarding the contractual and financial relationship
created by this Agreement shall be made by the Steering Committee acting in
accordance with this Agreement or by agents duly authorized in writing by the
Steering Committee. A quorum of the Steering Committee shall be present at any
meeting of the Steering Committee if Bill Tolbert and Robert L. Erwin, or a
replacement designated by a member party for each named individual not
attending, are present at such meeting in person or by telephone. If a quorum
exists at any meeting, the unanimous consent of all members of the Steering
Committee present at such meeting is required to take any action on behalf of
the Steering Committee, except as provided in Section 4.6.6. Neither member
party shall act or purport to act on behalf of the other party.
4.6.4 Responsibility of Steering Committee. The Steering Committee shall
be responsible for approving long-term objectives for, and evaluating the
progress of the Research Collaboration, including without limitation:
(a) reviewing and approving the Overall Research Plan, the Annual
Research Plan, and the intellectual property protection
strategy;
(b) reviewing and approving significant contracts with Third
Parties
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participating in the Research Collaboration;
(c) reviewing and approving the achievement of the milestones
established pursuant to Section 6.2(a); and
(d) reviewing and assessing each party's discovery, development
and marketing efforts pursuant to Article 5.
4.6.5 Steering Committee Reports. Within ten (10) days following each
meeting of the Steering Committee held pursuant to Section 4.6.2, the secretary
of the Steering Committee shall prepare and send to the members of the Steering
Committee a detailed written report of actions taken at the meeting in such form
and containing such detail as shall be determined by the Steering Committee.
4.6.6 Deadlock. In the event that the Steering Committee cannot reach
agreement within sixty (60) days as to any matter that is subject to its
decision-making authority, then, subject to the last sentence of this Section
4.6.6, TDCC shall cast the deciding vote in good faith on matters related to
conduct of the Research Collaboration other than those relating to: (i) the
interpretation of this Agreement and the amount of any payments due hereunder,
(ii) intellectual property ownership and the rights granted under Article 3, or
(iii) the scope of either party's freedom to commercialize Products in their
respective fields. Unresolved disputes related to (i), (ii) or (iii) above shall
be referred to dispute resolution in accordance with the procedures set forth in
Section 14.6, unless there is unanimous consent by members of the Steering
Committee. TDCC shall also have the deciding vote on the Annual Research Plan
and Overall Research Plan, so long as the activities, budget and objectives are
consistent with the summary in Schedule I.
4.7 Joint Patent Committee. To review inventions made in the course of
the Research Collaboration, a joint committee comprising one (1) named
representative of each of Biosource, TDCC and DAS (the "Joint Patent Committee")
shall be appointed and shall meet as needed. A party may change its
representative to the Joint Patent Committee at any time by notice to the other
parties. Additional members of the Joint Patent Committee may be appointed on an
ad hoc basis upon the mutual consent of the parties. The Joint Patent Committee
shall coordinate the intellectual property protection strategy of the parties
related to Technology developed in the course of the Research Collaboration to
minimize conflict and avoid to the extent feasible compromising intellectual
property positions through publication, destruction of novelty, obviousness and
the like, without incurring undue delay in efforts to commercially exploit the
Technology. The Joint Patent Committee shall determine whether data and
information may be published consistent with the protection of intellectual
property of the parties under terms of this Agreement. Consent to publication
shall not be unreasonably withheld by a party. If the parties cannot unanimously
agree about a party's right to publish or the contents of a publication,
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publication shall be deferred for a reasonable period so as not to jeopardize
the intellectual property rights of any party. If the parties can not agree as
to how to coordinate their respective strategies for the protection of
intellectual property, the Steering Committee shall review the issues and make a
determination as to how to resolve the differences among the parties.
5. DISCOVERY, DEVELOPMENT AND MARKETING EFFORTS
5.1 Discovery and Development Efforts by TDCC and DAS.
5.1.1 TDCC, at its own expense, shall use commercially reasonable efforts,
which in its sound business judgment can be profitably implemented, to (i) use
Discovery Technology licensed to TDCC by Biosource hereunder to discover and
develop Products in the TDCC Field and identify candidates for development, and
(ii) use Production Technology and Product Technology licensed to TDCC by
Biosource hereunder to develop and commercialize Products, either directly or
through Affiliates, DAS or permitted sublicensees. Such activities by TDCC shall
include:
(a) Utilizing its knowledge of industrial chemical markets,
especially of specialty chemicals and polymer markets, to
identify suitable product concepts and market opportunities to
direct the activities in the Research Collaboration;
(b) Providing analytical support where appropriate during the
Research Collaboration in the design, development and
operation of high throughput screens to select genes affecting
plant biochemistry or metabolism;
(c) Providing contract analytical services to DAS in support of
the Research Collaboration where appropriate; and
(d) Providing consultation in the design, implementation and
operation of automated extraction and analytical screens as
determined in the Annual Research Plan.
5.1.2 DAS, at its own expense, shall use commercially reasonable efforts,
which in its sound business judgment can be profitably implemented, to assist
TDCC to (i) use Discovery Technology licensed by Biosource hereunder to discover
and develop Products in the TDCC Field and identify candidates for development,
and (ii) use Production Technology and Product Technology licensed to TDCC by
Biosource hereunder to develop and commercialize Products, as may be sublicensed
or assigned to DAS by TDCC. Such activities shall include the following:
(a) Utilizing its knowledge of plant markets, in particular the
agricultural chemical and seed markets to identify suitable
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product concepts and market opportunities to provide guidance
for the activities in the Research Collaboration;
(b) Identifying, in conjunction with Biosource, appropriate gene
sources for candidates to develop as Products;
(c) Identifying and developing cost-effective screens for plant
traits (and genes);
(d) Utilizing internal screens to test Alliance Genes with
Transient Transformation Technology (vectors in particular)
from Biosource; and
(e) Developing or acquiring, in conjunction with Biosource, a
bioinformatics system capable of archiving and analyzing the
data on gene sequences and biological functions developed
during the Research Collaboration, and which will facilitate
efficient sharing of the gene sequence data and screening
results among DAS, TDCC and Biosource.
5.1.3 Investment Commitment. TDCC, its Affiliates (including Mycogen for
purpose of this paragraph only), DAS and the DAS Affiliates will at a minimum
achieve a combined funding level of on average $35,000,000 (thirty-five million
U.S. dollars) or more per Contract Year during the Research Collaboration
(subject to ramp-up during the first Contract Year), to support the discovery,
development and commercialization of genetically modified plants and products
(lower case) derived therefrom.
5.2 Marketing and Distribution Efforts by TDCC. TDCC, shall have
exclusive worldwide rights to market and distribute the TDCC Products. TDCC and
its permitted sublicensees and assignees shall at their own expense access their
respective marketing channels and use commercially reasonable efforts to obtain
regulatory approvals and to launch, promote, market and sell TDCC Products.
5.3 Discovery and Development Efforts by Biosource. Biosource agrees to
use diligent efforts during the term of the Research Collaboration to use
Discovery Technology, Production Technology and Product Technology Owned by
Biosource and Technology provided to Biosource by TDCC or by DAS to timely
achieve objectives and results established in the Overall Research Plan and
Annual Research Plan. Such efforts shall include, without limitation, the
following:
(a) Devoting the required number of personnel with requisite
experience and expertise, methodologies, know-how and other
capabilities to create or access high quality cDNA libraries;
or microbial libraries for gene discovery;
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(b) Automating certain Technology Owned by Biosource to rapidly
test genes of unknown function in plants using Discovery
Technology to identify the specific gene functions with the
objective of achieving or exceeding the milestones set forth
in Exhibit C on a sustained basis;
(c) Research directed towards developing Viral Vector Technology
capable of expressing genes in seed and reproductive tissues,
and developing the capability of expressing genes in monocots
via transfection;
(d) Acquiring or developing in conjunction with DAS a
bioinformatics system capable of archiving and analyzing the
data on gene sequences and biological functions developed
during the Research Collaboration, which will facilitate
efficient exchange of gene sequence data and screening results
among DAS, TDCC and Biosource; and
(e) Developing and implementing procedures for rapidly identifying
gene sequences which show biological activity in Biosource or
DAS screens (comparable to industry standards).
5.4 Marketing and Distribution Efforts by Biosource. Biosource and its
permitted sublicensees and assignees shall at their own expense access their
respective marketing channels and use commercially reasonable efforts to obtain
regulatory approvals and to launch, promote, market and sell Biosource Products.
6. PAYMENTS
6.1 Technology Access Fees. TDCC shall pay to Biosource a technology
access fee of [*] ([*] U.S. dollars) upon the Effective Date. Within sixty (60)
days after the beginning of each of the fourth, fifth, sixth and seventh
Contract Year during the Research Collaboration, TDCC shall pay to Biosource an
annual technology access fee of [*] ([*] U.S. dollars). Within sixty (60) days
after the beginning of the eighth and each subsequent Contract Year during the
Research Collaboration, TDCC shall pay to Biosource an annual technology access
fee of [*] ([*] U.S. dollars). All such technology access fees are
non-refundable, except the fee shall be refundable in the event that the
Agreement is rescinded as provided in Section 12.5.4. For avoidance of doubt, no
technology access fee shall be due under this Section 6.1 for any period after
the Research Collaboration ends.
6.2 Milestone Payments. TDCC shall pay to Biosource the milestone
payments described below as and when the corresponding milestones are achieved
in the course of the Research Collaboration.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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(a) TDCC shall pay Biosource up to $20,000,000 (twenty million
U.S. dollars), upon the achievement by Biosource of the
milestones described in Exhibit C hereto during the first
Contract Year of the Research Collaboration, and up to
$5,000,000 (five million U.S. dollars) per Contract Year upon
the achievement by Biosource of additional milestones to be
established by the Research Committee and approved by the
Steering Committee as part of the Annual Research Plan for
each of the second and the third Contract Years of the
Research Collaboration.
(b) Biosource will notify the Research Committee upon the
accomplishment of the milestones described in Exhibit C. The
Research Committee will promptly report such accomplishment to
the Steering Committee for consideration and approval. The
Steering Committee shall notify TDCC upon such approval and
TDCC shall make the corresponding milestone payments within
sixty (60) days after such notification. If the milestones
described in "A" of Item I in Exhibit C are not achieved
during the first Contract Year during the Research
Collaboration, then TDCC may elect, in its sole discretion, to
terminate the Research Collaboration on thirty (30) days
notice. If the milestones described in "B, C and D" of Item I
in Exhibit C are not achieved during the first Contract Year,
the Research Committee shall determine whether the milestones
should be modified. If Biosource fails to achieve the original
milestones described in Item I, B, C and D in Exhibit C, or
modified milestones (if any), by the end of the first eighteen
(18) months after the Effective Date, then TDCC may elect, in
its sole discretion, to terminate the Research Collaboration
on thirty (30) days notice. TDCC may, in its discretion and at
TDCC's expense, require Biosource to engage in an orderly
winding down of Research Services upon notice of Termination
under this Section 6.2(b), so as to finish works in progress
and complete transfer of Technology developed during the
Research Collaboration.
(c) TDCC shall pay Biosource the following milestone payments set
forth in this Section 6.2(c) with respect to each distinct
Trait of a TDCC Product, with only one milestone payment due
for each Trait regardless of the number of plant species in
which the Trait is expressed. No milestone payments will be
paid to Biosource for an incremental improvement (i.e., a
change that does not change the phenotypic property) made to a
Trait for which Biosource has previously received a milestone
payment under this Section 6.2(c). Nor will there be a
milestone payment due for the
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application or issuance of a registration of a Trait where the
Trait has been previously registered, but must be registered
again due to a molecular change not related to the Alliance
Genes, or if the change is a modification to the Alliance
Genes where such modification does not change the phenotypic
property of the Trait. There will be no more than one
milestone payment due for authorization of each commercial
facility to produce Industrial Products and no more than one
milestone payment due for First Commercial Sale of any or all
Industrial Products from each such commercial facility. In the
event that a TDCC Product may both be sold as a seed and as an
Industrial Product, no more than one payment of one million
U.S. dollars ($1,000,000) will be due for the milestones
described in both Sections 6.2(c)(i) & (iii) and no more than
one payment of one million U.S. dollars ($1,000,000) will be
due for the milestones described in both Sections 6.2(c)(ii)
&(iv) for such TDCC Product.
Milestone Payment
(i) Submission of first registration $1,000,000
application by TDCC, one of its
Affiliates, DAS or a DAS Affiliate for
each distinct Trait derived from one or
more Alliance Genes in a Product to be
sold as Seed.
(ii) Granting of the registration pursuant $1,000,000
to application described in (i) above for
a Product to be sold as Seed.
(iii) Authorization of construction of a $1,000,000
dedicated commercial facility to produce
Industrial Products from one or more
Alliance Genes with a projected sales
value of at least ten million U.S. dollars
($10,000,000) per year.
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(iv) First Commercial Sale of Industrial $1,000,000
Products from operation of the facility
described in (iii) above.
(d) TDCC will promptly notify Biosource through the Steering
Committee upon the accomplishment of each of the foregoing
milestones described in Section 6.2(c) and, within sixty (60)
days following the accomplishment of each milestone, TDCC
shall make the corresponding milestone payment.
6.3 Research Funding.
6.3.1 Funding During the Research Collaboration Term. During the term of
the Research Collaboration, TDCC will sponsor research to be carried out by
Biosource in accordance with the Overall Research Plan and applicable Annual
Research Plan subject to a sponsored research budget developed by the Research
Committee and approved by the Steering Committee not less than sixty (60) days
prior to the beginning of each Contract Year during the Research Collaboration.
Sponsored research funding shall cover Biosource's actual costs of performing
such sponsored research, including costs set forth in Schedule V, which costs
shall be reasonable and no greater than costs Biosource incurs for similar
activity outside the scope of the Research Collaboration. The costs in Schedule
V are for illustrative purposes only. Sponsored research funding shall be used
by Biosource only for activities related to the Annual Research Plan and Overall
Research Plan and shall not be used for purposes related to the Pharmaceutical
Field or Nicotiana Field without the prior written consent of TDCC. Capital
items and expenditures shall be reflected solely through depreciation
attributable to such items, assuming straight line depreciation. Each party
shall be responsible for costs it incurs in developing or acquiring a
bioinformatics system, unless otherwise agreed in writing by the parties.
Sponsored research expenses will be determined in accordance with generally
accepted accounting principles (GAAP) consistently applied. The parties expect
that Biosource will incur expenditures of approximately $12,000,000 (twelve
million U.S. dollars) per Contract Year during the Research Collaboration
(subject to ramp-up during the first Contract Year) on such sponsored research.
On or before the 15th day of each month of each Contract Year during the
Research Collaboration, TDCC will pay Biosource an amount equal to the expenses
budgeted for that month under the sponsored research budget, less any cumulative
amounts overpaid
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and not yet offset for previous periods. Within thirty (30) days following the
end of each calendar quarter, Biosource shall provide to TDCC: (i) a detailed
written accounting of the amount actually expended for research sponsored by
TDCC pursuant to this Section 6.3.1 during such quarter; (ii) an invoice for any
amount due in excess of that previously paid by TDCC for such quarter or a
credit for cumulative amounts overpaid and not yet offset for previous periods;
and (iii) an updated forecast for expenditures to be incurred for Research
Services during the current quarter; the following quarter and the current
calendar year. After receipt of each quarterly invoice, TDCC shall pay to
Biosource any reimbursement due for costs properly incurred in excess of
previous payments within sixty (60) days after receipt of the invoice. In no
event, however, shall TDCC be obligated to pay any amount in excess of
$12,000,000 (twelve million U.S. dollars) per Contract Year during the Research
Collaboration for sponsored research under this Section 6.3.1, unless an Annual
Research Plan contemplating a higher level of payments has been approved by the
Steering Committee or TDCC has approved such expenditures in accordance with
Section 6.3.3. In the event of any overpayment to Biosource, TDCC shall be
entitled to a reduction in future payments under this Section 6.3.1 until any
amounts it has previously overpaid have been completely offset.
6.3.2 Funding For Third Party Research. During the term of the Research
Collaboration, TDCC intends to spend on average $3,000,000 (three million U.S.
dollars) per calendar year to fund sponsored research to be carried out by Third
Parties related to the development of applications in the TDCC Field and TDCC
Products. TDCC shall consult with the Research Committee in selecting such
research to sponsor, but TDCC shall not be obligated to sponsor research by
Third Parties unless TDCC believes it will substantially promote development of
commercially promising applications. Potential Third Party recipients of such
funding may be brought to the attention of the Research Committee by any party.
TDCC shall determine which party is in the better position to provide oversight
of the Third Party conducting the research and may elect to sponsor research
indirectly through Biosource. TDCC, DAS and Biosource may each impose reasonable
restrictions on the provision of Technology Owned by a party to Third Parties
for the purpose of protecting proprietary rights therein including rights
granted under this Agreement.
6.3.3 Additional Expenditures. In the event that the scope, scale or
direction of the Research Collaboration as described in the Overall Research
Plan or the applicable Annual Research Plan changes after being approved by the
Research Committee and Steering Committee, any additional expenditures
reasonably required to be made by Biosource to support the Research
Collaboration shall be funded by TDCC; provided, that all such changes in the
scope, scale or direction of the Research Collaboration which may trigger
additional funding by TDCC and the maximum amount of any such additional
expenditures shall be approved in advance by TDCC.
6.4 Royalties Payable by TDCC.
6.4.1 General. Following the First Commercial Sale of any TDCC Product as
set forth in Section 6.4.2., TDCC will pay, on a quarterly basis, a royalty in
the amounts set forth below based on applicable sales of TDCC Products.
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6.4.2 Royalties on TDCC Products. In consideration of the licenses and
other rights granted to TDCC, TDCC shall pay to Biosource a royalty based on (i)
a percentage of the Net Sales of TDCC Products and/or (ii) a percentage of the
value added to such TDCC Products, as follows:
6.4.2.1 Agrochemicals. TDCC will pay Biosource [*] of the increase
in Net Sales of an agrochemical product (lower case) resulting from a new use of
such product (lower case) that is enabled by Product Technology. An example
would be a new crop use for an existing herbicide as a result of a new
herbicide-tolerant Trait in a TDCC Product. In the event that the increase in
Net Sales of an agrochemical product resulting from such a new use proves
difficult to determine accurately, TDCC and Biosource shall negotiate in good
faith to select an alternative basis for the calculation of royalty due under
this Section 6.4.2.1, which both parties deem will yield a royalty of a
commensurate amount.
6.4.2.2 Seed. Royalties on TDCC Products that constitute seed sold
through TDCC, its Affiliates, DAS and the DAS Affiliates ("TDCC Seed Products")
shall be determined as follows:
(a) Exclusive. TDCC will pay Biosource (i) [*] of Net Sales of
TDCC Seed Products sold exclusively through TDCC, its
Affiliates, DAS and the DAS Affiliates, plus (ii) [*] of
Agricultural Value-Added by a distinct Trait in such TDCC
Seed Products, where such distinct Trait is either derived
from one or more Alliance Genes or discovered or developed
by exercise of TDCC post-Research Collaboration rights as
further provided in Sections 3.1 and 3.3 hereof, until the
total Agricultural Value-Added by the Trait in such TDCC
Seed Products exceeds [*] ([*] U.S. dollars) in any calendar
year, and (iii) [*] of the Agricultural Value-Added in
excess, if any, of [*] ([*] U.S. dollars) in that year.
(b) Non-Exclusive. TDCC will pay Biosource: (i) [*] of
Agricultural Value-Added by a distinct Trait in TDCC Seed
Products sold non-exclusively through TDCC, its Affiliates,
DAS and the DAS Affiliates, where such distinct Trait is
either derived from one or more Alliance Genes or discovered
or developed by exercise of TDCC post-Research Collaboration
rights as further provided in Sections 3.1 and 3.3 hereof,
until the total Agricultural Value-Added by the Trait in
such TDCC Seed Products exceeds [*] ([*] U.S. dollars)
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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in any calendar year, plus (ii) [*] of the Agricultural
Value-Added in excess, if any, of [*] [*] [*] U.S. dollars)
in that year.
(c) TDCC Agricultural Cumulative Investment Recovered.
Notwithstanding clauses (a)(ii)&(iii) and (b)(i)&(ii) of
this Section 6.4.2.2, at any time the TDCC Agricultural
Cumulative Investment is $0 or a negative number as of the
end of the latest quarter for which financial statements of
TDCC and DAS are available, TDCC will pay Biosource [*] of
Agricultural Value-Added by all distinct Traits in TDCC Seed
Products, where such distinct Traits are either derived from
one or more Alliance Genes or discovered or developed by
exercise of TDCC post-Research Collaboration rights as
further provided in Sections 3.1 and 3.3 hereof, instead of
the amounts in clauses (a)(ii)&(iii) and (b)(i)&(ii) of
Section 6.4.2.2.
6.4.2.3 Industrial Products.
(a) TDCC will pay Biosource [*] of Net Sales of TDCC Products
that constitute Industrial Products sold by TDCC, its
Affiliates, DAS and the DAS Affiliates at any time the TDCC
Industrial Cumulative Investment is greater than $0 as of
the end of the latest quarter for which financial statements
of TDCC and DAS are available.
(b) In the event that the TDCC Industrial Cumulative Investment
is $0 or a negative number as of the end of the latest
quarter for which financial statements of TDCC and DAS are
available, TDCC will pay Biosource the greater of: (i) [*]
of Net Sales of TDCC Products that constitute Industrial
Products; or (ii) [*] of Non-Agricultural Value-Added by a
distinct Trait in such TDCC Industrial Products, where such
distinct Trait is either derived from one or more Alliance
Genes or discovered or developed by exercise of TDCC
post-Research Collaboration rights as further provided in
Sections 3.1 and 3.3 hereof, until the total
Non-Agricultural Value-Added by the Trait exceeds [*] [*]
U.S. dollars) in any calendar year, plus, [*] of the
Non-Agricultural Value-Added in excess, if any, of
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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[*] ([*] U.S. dollars) in that
year.
6.4.2.4 TDCC Product Technology. The royalty rates described in
Sections 6.4.2.1, through 6.4.2.3 shall be reduced by [*]
percent ([*]%) for: (i) any TDCC Products that use
Technology Owned or acquired from a Third Party by TDCC, its
Affiliates, DAS or the DAS Affiliates and which is related
to Demeter Technology, Photorhabdus, Xenorhabdus, Bacillus
thuringiensis, and Saccharopolyspora spinosa; or (ii) any
TDCC Products the manufacture, sale or use of which are not
covered by either TDCC Patent Rights, that claim inventions
discovered in the course of Research Collaboration or
exercise of post-Research Collaboration rights granted in
Sections 3.1 or 3.3 hereof, or Biosource Patent Rights.
6.4.3 Access Fees From Third Parties. TDCC shall pay to Biosource [*]
[*] ([*]%) of any Technology access fees, royalties and other consideration
(but excluding any royalties or other fee paid for any Products which are
included in Agricultural Value-Added or Non-Agricultural Value-Added and reduced
by costs as set forth hereinafter) received by TDCC from any Third Party in
consideration of any permitted uses of Discovery Technology Owned by Biosource
licensed to TDCC and sublicensed by TDCC to the Third Party during the Research
Collaboration pursuant to Section 3.1. Such Technology access fees shall not be
considered in determining Agricultural Value Added or Non-Agricultural
Value-Added. In the event that Discovery Technology Owned by Biosource is
sublicensed together with Technology Owned by TDCC or DAS or part of the
consideration is non-monetary, e.g., a cross-license, the fair market value of
the Discovery Technology Owned by Biosource which is sublicensed shall be
determined and used as the basis for payment to Biosource. The access fees or
royalties shall be reduced by any costs of TDCC incurred in granting the rights
to the Third Party prior to determining the amount to be paid to Biosource.
6.4.4 Royalty Reports, Exchange Rates. During the term of this Agreement
following the First Commercial Sale of any TDCC Product or receipt of any
Technology access fees subject to Section 6.4.3, TDCC shall within ninety (90)
days after each calendar quarter pay estimated royalties on the Net Sales of the
TDCC Product and Biosource's share of any Technology access fee. A royalty
report shall accompany the estimated royalty payment and payment of any
Technology access fee under Section 6.4.3. Such royalty report will include a
list of the TDCC Products covered, the dates of the First Commercial Sales of
TDCC Products, and the basis for any Technology access fee. The report shall
indicate how estimated royalties were calculated including: (i) the gross sales
of the TDCC Products sold by TDCC, its Affiliates, DAS and the DAS Affiliates,
and the calculation of Net Sales, Agricultural Value-Added, Non-Agricultural
Value-Added and recovery of Agricultural Cumulative Investment and/or Industrial
Cumulative Investment attributable to such gross sales; (ii) the sublicense
payments received by TDCC; (iii) the royalties and other payments payable in
United States dollars which shall have accrued hereunder in respect of such
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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sales and sublicense payments; (iv) withholding taxes, if any, required by law
to be deducted in respect of such royalties and sublicense payments; and (v) the
exchange rates used in determining the amount of United States dollars payable
hereunder. Royalties payable on Net Sales in countries other than the United
States shall be calculated by multiplying the appropriate royalty rate times the
Net Sales in each currency in which they are made and converting the resulting
amount into United States dollars at the rates of exchange used by TDCC for
reporting such sales for United States financial statement purposes. As soon as
practical after the end of each calendar year during the term of this Agreement,
TDCC shall make a full accounting of actual royalties due Biosource for such
calendar year. If the actual royalties owed to Biosource for such calendar year
exceed the estimated royalties paid for such calendar year, then TDCC shall pay
the difference to Biosource within thirty (30) days of the date that the full
accounting is completed. If the actual royalties owed to Biosource for such
calendar year are less than the estimated royalties paid to Biosource for such
calendar year, then such overpayment shall either be credited against future
estimated royalties to be paid by TDCC or shall be reimbursed to TDCC, whichever
is acceptable to TDCC at such time. In the event that there is no payment
adjustment, a statement setting forth that fact shall be supplied to Biosource.
6.4.5 Audits. TDCC shall permit an independent certified public accountant
selected by Biosource and acceptable to TDCC, which acceptance shall not be
unreasonably withheld, to have access during normal business hours to such
records of TDCC as may be reasonably necessary to verify the accuracy of royalty
reports as described in Section 6.4.4. An audit may be conducted for the
previous two (2) fiscal years. The audit shall not be conducted for an
incomplete fiscal year where only estimated royalties have been paid. Biosource
and TDCC shall use commercially reasonable efforts to schedule all such
verifications within forty-five (45) days after Biosource makes its written
request for the audit. All such verifications shall be conducted at Biosource's
expense and not more than once in each calendar year. Subject to TDCC's rights
to dispute amounts payable under Section 14.6, in the event Biosource's
independent certified public accountant concludes that additional royalties were
owed to Biosource during such period, the additional royalty shall be paid by
TDCC within sixty (60) days after the date Biosource delivers to TDCC such
independent certified public accountant's written report so concluding. In the
event Biosource's independent certified public accountant concludes that there
was an overpayment of royalties to Biosource during such period, the overpayment
less the reasonable fees and expenses charged by such representative shall be
repaid by Biosource within sixty (60) days after the date Biosource received
such independent certified public accountant's written report so concluding. The
fees charged by such independent certified public accountant shall be paid by
Biosource unless the audit discloses an underpayment of the royalties payable by
TDCC for the audited period of more than five percent (5%), in which case TDCC
shall pay the reasonable fees and expenses charged by such representative. TDCC
shall include in each Third Party sublicense granted by it pursuant to this
Agreement a provision requiring the
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sublicensee to keep and maintain records of sales made pursuant to such
sublicense and to grant access to such records by an independent certified
public accountant to the same extent required of TDCC under this Agreement.
Biosource agrees that all information subject to review under this Section 6.4.5
or under any sublicense agreement is confidential and that Biosource shall cause
its independent certified public accountant to enter into a confidentiality
agreement with TDCC or a sublicensee, where appropriate, obligating such
accountant to retain all such information in confidence. Biosource's independent
certified public accountant shall only report to Biosource as to the computation
of the royalties and other payments due to Biosource under this Agreement and
shall not disclose to Biosource any other information of TDCC or its
sublicensees.
6.4.6 Expiration of TDCC Royalty Obligation. TDCC's obligation to pay
royalties under this Agreement to Biosource in respect of a TDCC Product, shall
cease: (i) if manufacture, sale or use of the TDCC Product is not covered by
Patent Rights as provided in part (ii) of this Section 6.4.6, on the last day of
a calendar quarter in which falls the tenth (10th) anniversary of the First
Commercial Sale of any TDCC Product, directly or indirectly, by TDCC, one of its
Affiliates, DAS or a DAS Affiliate anywhere in the world, or (ii) if the
manufacture, sale or use of the TDCC Product is covered in the country where
such activity occurs by either TDCC Patent Rights, which claim inventions
discovered in the course of Research Collaboration or in the exercise of
post-Research Collaboration rights granted in Sections 3.1 or 3.3 hereof, or
Biosource Patent Rights, upon the occurrence of any of the following: (a) the
expiration of the last Valid Claim of the aforementioned Patent Rights covering
the TDCC Product in that country that can reasonably be expected to deliver
Agricultural Value-Added or Non-Agricultural Value-Added to TDCC or DAS, (b)
when the remaining Valid Claims of the aforementioned Patent Rights covering the
TDCC Product in that country will no longer deliver significant Agricultural
Value-Added or Non-Agricultural Value-Added to TDCC or DAS, or (c) when the
remaining Valid Claims of such the aforementioned Patent Rights covering the
TDCC Product in that country are likely to be held invalid or unenforceable.
6.4.7 Adjustment of Royalty Rates. The royalty rates and duration of
royalty payments by TDCC under Sections 6.4.1 to 6.4.6 are believed fair and
reasonable as of the Effective Date. However, in the event Third Parties are
able to offer products (lower case) competing with TDCC Products which make it
difficult for TDCC to achieve the returns it requires to justify investment in
development and commercialization of TDCC Products, TDCC and Biosource shall
re-negotiate in good faith the royalties and milestone payments due under
Article 6. In addition, in the event Biosource offers any Third Party overall
more favorable terms for a license of Discovery Technology for use in Products
in the TDCC Field than that granted to TDCC, Biosource shall promptly offer TDCC
a license on terms at least as favorable.
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6.5 Royalties Payable by Biosource.
6.5.1 General. Following the First Commercial Sale of any Biosource
Product as set forth in Section 6.5.2, Biosource will pay, on a quarterly basis,
a royalty in the amounts set forth below based on applicable sales of Biosource
Products, provided, however, that no royalty shall be payable on Products in the
Pharmaceutical Field or the Nicotiana Field.
6.5.2 Royalties on Biosource Products. In consideration of the licenses
and other rights granted to Biosource, Biosource shall pay to TDCC a royalty on
Biosource Products based on (i) a percentage of the Net Sales of such Biosource
Products, and/or (ii) a percentage of the value added to such Biosource
Products, as follows; provided, however, that no royalty shall be payable on
Products in the Pharmaceutical Field or the Nicotiana Field:
6.5.2.1 Seed. Royalties on Biosource Products that constitute seed
("Biosource Seed Products") shall be determined as follows:
(a) Exclusive. Biosource will pay TDCC (i) [*]% of Net Sales of
Biosource Seed Products sold exclusively through Biosource
and its Affiliates, plus (ii) [*]% of Agricultural
Value-Added by a distinct Trait in such Biosource Seed
Products, where such distinct Trait is either derived from
one or more Alliance Genes or developed or manufactured by
exercise of rights granted to Biosource in Section 3.5
hereof, until the total Agricultural Value-Added by the
Trait in such Biosource Seed Products exceeds $ [*] ([*]
U.S. dollars) in any calendar year, and (iii) [*] of the
Agricultural Value-Added in excess, if any, of [*] ([*] U.S.
dollars) in that year.
(b) Non-Exclusive. Biosource will pay TDCC: (i) [*]% of
Agricultural Value-Added by a distinct Trait in Biosource
Seed Products sold non-exclusively through Biosource and its
Affiliates, where such distinct Trait is either derived from
one or more Alliance Genes or developed or manufactured by
exercise of rights granted to Biosource in Section 3.5
hereof, until the total Agricultural Value-Added by the
Trait in such Biosource Seed Products exceeds [*] ([*] U.S.
dollars) in any calendar year, plus (ii) [*] of the
Agricultural Value-Added in excess, if any, of [*] ([*] U.S.
dollars) in that year.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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(c) Biosource Agricultural Cumulative Investment Recovered.
Notwithstanding clauses (a)(ii)&(iii) and (b)(i)&(ii) of
this Section 6.5.2.1, at any time the Biosource
Agricultural Cumulative Investment is $0 or a negative
number as of the end of the latest quarter for which
financial statements of Biosource are available, Biosource
will pay TDCC [*] of Agricultural Value-Added by all
distinct Traits in Biosource Seed Products, which Traits
are either derived from one or more Alliance Genes or
developed or manufactured by exercise of rights granted to
Biosource in Section 3.5 hereof, instead of the amounts in
clauses (a)(ii)&(iii) and (b)(i)&(ii) of this Section
6.5.2.1.
6.5.2.2 Industrial Products.
(a) Biosource will pay TDCC [*] of Net Sales of Biosource
Products that constitute Industrial Products sold by
Biosource or its Affiliates, at any time the Biosource
Industrial Cumulative Investment is greater than $0 as of
the end of the latest quarter for which financial statements
of Biosource are available.
(b) In the event that the Biosource Industrial Cumulative
Investment is $0 or a negative number as of the end of the
latest quarter for which financial statements of Biosource
are available, Biosource will pay TDCC the greater of: (i)
[*] of Net Sales of Biosource Products that constitute
Industrial Products, or (ii) [*] of Non-Agricultural
Value-Added by a distinct Trait in such Biosource Industrial
Products, where such Trait is either derived from one or
more Alliance Genes or is developed or manufactured by
exercise of rights granted to Biosource in Section 3.5
hereof, until the total Non-Agricultural Value Added by the
Trait in such Biosource Industrial Products exceeds [*] ([*]
U.S. dollars) in any calendar year, plus [*] of the
Non-Agricultural Value-Added in excess, if any, of
$ * ( * U.S. dollars) in that
year.
6.5.2.3 Agrochemicals. No royalty is set for agrochemical product
sales resulting from a new use of such product (lower case) that is enabled by
Product Technology or exercise of rights granted to Biosource under Section 3.5,
because it is not contemplated that Biosource or its Affiliates shall make such
sales. In the event that Biosource desires such a license, TDCC and Biosource
shall negotiate in good faith to
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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determine a royalty and other terms for such a license. It is agreed that any
royalty to be paid by Biosource on Agrochemicals may appropriately be higher
than the royalty payable by TDCC under Section 6.4.2.1.
6.5.3 Access Fees From Third Parties. Biosource shall pay to TDCC [*] [*]
[*] of any Technology access fees, royalties and other consideration (but
excluding any volume-based royalties or other fee paid for any Products which
are included in Agricultural Value-Added or Non-Agricultural Value-Added and
reduced by costs as set forth hereinafter) received by Biosource from any Third
Party in consideration of any permitted sublicenses of Technology Owned by TDCC
licensed to Biosource pursuant to Section 3.5 and sublicensed to the Third
Party. Such Technology access fees shall not be considered in determining
Agricultural Value Added or Non-Agricultural Value-Added. In the event that
Technology Owned by TDCC is used together with Technology Owned by Biosource or
part of the consideration is non-monetary, e.g., a cross-license, the fair
market value of the Technology Owned by TDCC shall be determined and used as the
basis for payment to TDCC. The access fee or royalties shall be reduced by any
costs of Biosource incurred in granting the rights to the Third Party prior to
determining the amount to be paid to TDCC.
6.5.4 Royalty Reports, Exchange Rates. During the term of this Agreement
following the First Commercial Sale of any Biosource Product or receipt of any
Technology access fees subject to Section 6.5.3, Biosource shall within ninety
(90) days after each calendar quarter pay estimated royalties on the Net Sales
of the Biosource Product and TDCC's share of any Technology access fee. A
royalty report shall accompany the estimated royalty payment and payment of any
Technology access fee due under Section 6.5.3. Such royalty report will include
a list of the Biosource Products covered, the dates of the First Commercial
Sales of Biosource Products, and the basis for any Technology access fee. The
report shall indicate how estimated royalties were calculated including: (i) the
gross sales of the Biosource Products sold by Biosource and its Affiliates and
the calculation of Net Sales, Agricultural Value-Added, Non-Agricultural
Value-Added and recovery of Agricultural Cumulative Investment and/or Industrial
Cumulative Investment attributable to such gross sales; (ii) the sublicense
payments received by Biosource; (iii) the royalties and other payments payable
in United States dollars which shall have accrued hereunder in respect of such
sales and sublicense payments; (iv) withholding taxes, if any, required by law
to be deducted in respect of such royalties and sublicense payments; and (v) the
exchange rates used in determining the amount of United States dollars payable
hereunder. Royalties payable on Net Sales in countries other than the United
States shall be calculated by multiplying the appropriate royalty rate times the
Net Sales in each currency in which they are made and converting the resulting
amount into United States dollars at the rates of exchange used by Biosource for
reporting such sales for United States financial statement purposes. As soon as
practical after the end of each calendar year during the term of this Agreement,
Biosource shall make a full accounting
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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of actual royalties due TDCC for such calendar year. If the actual royalties
owed to TDCC for such calendar year exceed the estimated royalties paid for such
calendar year, then Biosource shall pay the difference to TDCC within thirty
(30) days of the date that the full accounting is completed. If the actual
royalties owed to TDCC for such calendar year are less than the estimated
royalties paid to TDCC for such calendar year, then such overpayment shall
either be credited against future estimated royalties to be paid by or shall be
reimbursed to Biosource, whichever is acceptable to Biosource at such time. In
the event that there is no payment adjustment, a statement setting forth that
fact shall be supplied to TDCC.
6.5.5 Audits. Biosource shall permit an independent certified public
accountant selected by TDCC and acceptable to Biosource, which acceptance shall
not be unreasonably withheld, to have access during normal business hours to
such records of Biosource as may be reasonably necessary to verify (i) the
accuracy of royalty reports as described in Section 6.5.4, and (ii) that the
funds paid by TDCC pursuant to Section 6.3 were properly used in accordance with
the terms of this Agreement. An audit may be conducted for the previous two (2)
fiscal years. No audit of royalty reports shall be conducted for an incomplete
fiscal year where only estimated royalties have been paid. Biosource and TDCC
shall use commercially reasonable efforts to schedule all such verifications
within forty-five (45) days after TDCC makes its written request for the audit.
All such verifications shall be conducted at TDCC's expense and not more than
once in each calendar year. Subject to Biosource's rights to dispute amounts
payable under Section 14.6, in the event TDCC's independent certified public
accountant concludes that that additional amounts were owed to TDCC during such
period or amounts were used improperly by Biosource, the additional amount shall
be paid by Biosource within sixty (60) days after the date TDCC delivers to
Biosource such independent certified public accountant's written report so
concluding. In the event TDCC's independent certified public accountant
concludes that there was an overpayment to TDCC or underpayment by TDCC during
such period, the amount payable less the reasonable fees and expenses charged by
such representative shall be repaid by TDCC within sixty (60) days after the
date Biosource received such independent certified public accountant's written
report so concluding. The fees charged by such independent certified public
accountant shall be paid by TDCC unless the audit discloses an underpayment of
the amounts listed in clauses (i), or misuse of funds paid by TDCC listed in
clause (ii) above, for the audited period of more than five percent (5%), in
which case Biosource shall pay the reasonable fees and expenses charged by such
representative. Biosource shall include in each Third Party sublicense granted
by it pursuant to this Agreement a provision requiring the sublicensee to keep
and maintain records of sales made pursuant to such sublicense and to grant
access to such records by an independent certified public accountant to the same
extent required of TDCC under this Agreement. TDCC agrees that all information
subject to review under this Section 6.5.5 or under any sublicense agreement is
confidential and that TDCC shall cause its independent certified public
accountant to enter into a confidentiality agreement with Biosource or a
sublicensee, where appropriate,
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obligating such accountant to retain all such information in confidence. TDCC's
independent certified public accountant shall only report to TDCC as to the
computation of the royalties and other payments due to TDCC under this Agreement
and shall not disclose to TDCC any other information of Biosource or its
sublicensees.
6.5.6 Expiration of Biosource Royalty Obligation. Biosource's obligation
to pay royalties under this Agreement to TDCC in respect of a Biosource Product
shall cease as of: (i) if manufacture, sale or use of the Biosource Product is
not covered by Patent Rights as provided in part (ii) of this Section 6.5.6, on
the last day of a calendar quarter in which falls the tenth (10th) anniversary
of the First Commercial Sale of any Biosource Product for which royalties are
payable under Section 6.5.2, directly or indirectly, by Biosource or one of its
Affiliates anywhere in the world; or (ii) if the manufacture, sale or use of the
Biosource Product is covered by Patent Rights in the country where such activity
occurs, which claim inventions discovered in the course of Research
Collaboration or in the exercise of post-Research Collaboration rights granted
to Biosource in Sections 3.5 hereof, upon the occurrence of any of the
following: (a) the expiration of the last Valid Claims of the aforementioned
Patent Rights covering the Biosource Product in that country that can reasonably
be expected to deliver Agricultural Value-Added or Non-Agricultural Value-Added
to Biosource, (b) when the remaining Valid Claims of the aforementioned Patent
Rights covering the Biosource Product in that country will no longer deliver
significant Agricultural Value-Added or Non-Agricultural Value-Added to
Biosource, or (c) when the remaining Valid Claims of the aforementioned Patent
Rights in that country are likely to be held invalid or unenforceable.
6.5.7 Royalty Adjustments. The royalty rates and duration of royalty
payments by Biosource under Sections 6.5.1 to 6.5.6 are believed fair and
reasonable as of the Effective Date. However, in the event Third Parties are
able to offer products (lower case) competing with Biosource Products which make
it difficult for Biosource to achieve the returns it requires to justify
investment in development and commercialization of Biosource Products on which
royalties are payable to TDCC hereunder, TDCC and Biosource shall re-negotiate
in good faith the royalty payments due TDCC under Article 6.
6.6 Guidelines. Set forth in Exhibit B are guidelines for the
calculation of cumulative investment, value-added and royalties under this
Agreement. These guidelines are for illustrative purposes only and shall not
evidence the intent of the parties in any particular factual situation not
expressly stated therein. The guidelines may be referred to by TDCC and
Biosource in preparing the royalty reports required under Sections 6.4.4 and
6.5.4 and shall be considered in the resolution of any dispute over royalties
due hereunder.
6.7 Withholding Taxes. The party paying royalties shall deduct any
withholding taxes and governmental charges only from royalty payments agreed
upon
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under this Agreement and as required by law and pay them to the proper tax
authorities. The party paying royalties shall not deduct any other withholding
or any other governmental charges from the payments agreed upon under this
Agreement, including but not limited to any such taxes or charges incurred as a
result of an assignment or sublicense by such party to any Affiliate or any
Third Party, except as noted above. The party paying royalties shall maintain
official receipts of payment of any withholding taxes and make these receipts
available to the other party. The parties will exercise diligent efforts to
ensure that any withholding taxes imposed are reduced as far as possible under
the provisions of any treaties applicable to any payment made hereunder.
6.8 Blocked Currency. If transfer of amounts payable hereunder to United
States dollars is subject to administrative authorization, the party paying
royalties to the other party under this Agreement shall promptly file the
transfer application with the competent authorities supported by all requisite
documentation, and use its reasonable efforts to obtain such authorization and
to the extent possible effect the remittance within the applicable period set
forth under this Article 6. For the purpose of royalties on Net Sales and
sharing of Technology access fees, no payment shall be due under Sections 6.4
and 6.5 except to the extent payments for goods sold and Technology access fees
have actually been received.
6.9 Interest on Late Payments. Any payments that are not paid on or
before thirty (30) days after the date such payments are due under this
Agreement shall bear interest, to the extent permitted by applicable law, at one
percent (1%) per month, calculated on the total number of days payment is
delinquent; provided, however, that interest shall not accrue pursuant to this
Section 6.9 on any amounts payable under this Agreement with respect to which
payment is disputed in good faith; provided further that interest shall accrue
pursuant to this Section 6.9 once such dispute has been resolved if payment is
not made promptly thereafter.
6.10 Manner of Payment. Payments to be made by either party under this
Agreement shall be payable in United States dollars and shall be paid by bank
wire transfer in immediately available funds to such bank account as is
designated in writing from time to time by the party receiving the payment. If
one party is owed an amount by another party under this Agreement, it shall upon
notice to the other party be entitled to set-off such amount payable by the
other party against amounts it is obligated to pay to the other party pursuant
to this Agreement.
7. INTELLECTUAL PROPERTY
7.1 Ownership.
7.1.1 Research Collaboration Inventions. Through legal documents,
Biosource, TDCC and DAS have previously caused employees and contract employees
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to have the obligation to assign over entire right and title in inventions to
them. Biosource and DAS shall each have their employees and contract employees,
who are involved with the Research Collaboration, and TDCC shall have its
employees and contract employees, who spend at least twenty-five percent (25%)
of their work time on the Research Collaboration, execute an addendum to their
prior contractual obligation for invention assignment so that the entire right
and title to patentable inventions discovered in the course of the Research
Collaboration are assigned as follows:
(a) Discovery Technology. Biosource shall solely own all
patentable inventions discovered in the course of the Research
Collaboration that constitute Discovery Technology. In the
event that one or more employees of TDCC, or DAS is an
inventor of such a patentable invention, TDCC or DAS, as
appropriate, shall cause such employee(s) to assign all of
his/her rights in such invention, including all intellectual
property rights therein, to Biosource.
(b) Production Technology. TDCC shall solely own all patentable
inventions discovered in the course of the Research
Collaboration that constitute Production Technology. In the
event that one or more employees of Biosource is an inventor
of such a patentable invention, Biosource shall cause such
employee(s) to assign all of his/her rights in such invention,
including all intellectual property rights therein, to TDCC.
(c) Product Technology. Ownership of all patentable inventions
discovered in the course of the Research Collaboration that
constitute Product Technology (specifically including, but not
limited to composition of matter claims to Alliance Genes)
shall be solely determined based on comparative relevance to
the Biosource Field and the TDCC Field. The parties shall have
an obligation to assign rights to each other as follows: (i)
Biosource shall solely own all patentable inventions
discovered in the course of the Research Collaboration that
constitute Product Technology, where the sole use of the
Product Technology is in the Biosource Field; provided,
however, that any development of inventions in the Biosource
Field shall not be part of Research Services. In the event
that one or more employees of TDCC or DAS is an inventor of
such an invention, TDCC or DAS, as appropriate, shall cause
such employees to assign all of his/her rights in such
invention, including all intellectual property rights therein,
to Biosource; (ii) TDCC shall solely own all patentable
inventions discovered in the course of the Research
Collaboration that constitute Product Technology, where the
sole use of the Product Technology is in the TDCC Field, or
relate to genes, nucleotide
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sequences or fragments thereof of Photorhabdus, Xenorhabdus,
Bacillus thuringiensis, and Saccharopolyspora spinosa or
Demeter Genes. In the event that one or more employees of
Biosource is an inventor of such an invention, Biosource shall
cause such employee(s) to assign all of his/her rights in such
invention, including all intellectual property rights therein,
to TDCC; (iii) where patentable inventions are discovered in
the course of the Research Collaboration that constitute
Product Technology that have uses in both the Biosource Field
and TDCC Field, the invention shall be Owned solely by TDCC.
In the event that one or more employees of a party is an
inventor of such a patentable invention Owned by another party
under this Section 7.1.1(c), the party shall cause such
employee(s) to assign all of his/her rights in such invention,
including all intellectual property rights therein, to the
party having ownership hereunder .
(d) Transient Transformation Technology. Biosource shall solely
own all patentable inventions discovered in the course of the
Research Collaboration that constitute Transient
Transformation Technology derived from Viral Vector Technology
Owned by Biosource. In the event that one or more employees of
TDCC or DAS is an inventor of such an invention, TDCC or DAS,
as appropriate shall cause such employee(s) to assign all of
his/her rights in such invention, including all intellectual
property rights therein, to Biosource.
7.1.2 Other Inventions during the Research Collaboration. Other Inventions
which are patentable shall be owned as follows: (i) TDCC shall solely own all
Other Inventions made solely by employees of TDCC; (ii) Biosource shall solely
own all Other Inventions made solely by its employees; (iii) DAS shall solely
own all Other Inventions made solely by employees of DAS; and (iv) Other
Inventions made jointly by two or more parties shall be jointly owned by the
parties whose employees jointly discovered same.
7.1.3 Rights Granted Under Article 3. The ownership of or assignment of
inventions pursuant to this Section 7.1, shall not be construed to modify or
preempt any rights granted to a party pursuant to Article 3.
7.2 Prosecution and Maintenance of Patent Rights.
7.2.1 Biosource Patentable Inventions. Subject to the provisions of
Section 7.2.3, Biosource shall have the exclusive right and option to file and
prosecute, and to designate a patent attorney for such purposes to whom TDCC has
no reasonable objection, any patent applications and maintain any patents that
cover patentable
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inventions discovered in the course of the Research Collaboration that are
solely owned by Biosource.
7.2.2 TDCC Patentable Inventions. Subject to the provisions of Section
7.2.4, TDCC shall have the exclusive right and option to file and prosecute, and
to designate a patent attorney for such purposes to whom Biosource has no
reasonable objection, any patent applications and maintain any patents that
cover inventions discovered in the course of the Research Collaboration that are
solely owned by TDCC.
7.2.3 Improvements to Transient Transformation Technology During the
Research Collaboration. Biosource shall have the exclusive right and option to
file and prosecute any patent applications and to maintain any patents that
claim patentable inventions discovered in the course of the Research
Collaboration that constitute Transient Transformation Technology; provided,
however, that in the event that Biosource declines the option to file and
prosecute any such patent applications or maintain any such patents, it shall
give TDCC reasonable notice to this effect and, thereafter, TDCC may, upon
written notice to Biosource, file and prosecute such patent applications and/or
maintain such patents.
7.2.4 Improvements to Production Technology During the Research
Collaboration. TDCC shall have the exclusive right and option to file and
prosecute any patent applications and to maintain any patents that claim
patentable inventions discovered in the course of the Research Collaboration
that constitute Production Technology; provided, however, that in the event that
TDCC declines the option to file and prosecute any such patent applications or
maintain any such patents, it shall give Biosource reasonable notice to this
effect and, thereafter, Biosource may, upon written notice to TDCC, file and
prosecute such patent applications and/or maintain such patents.
7.2.5 Jointly Owned Inventions. TDCC shall have the exclusive right and
option to file and prosecute any patent applications and to maintain any patents
that cover Other Inventions that are jointly owned, provided, however, that in
the event that TDCC declines the option to file and prosecute any such patent
applications or maintain any such patents, it shall give Biosource reasonable
notice to this effect and thereafter Biosource may, upon written notice to TDCC,
file and prosecute such patent applications and/or maintain such patents.
7.2.6 Costs and Expenses. Each of the parties shall bear its own costs and
expenses in filing, prosecuting and maintaining its Patent Rights.
7.2.7 Notice of Intellectual Property Arising From the Research
Collaboration and Review of Publications. TDCC, DAS and Biosource each shall
provide prompt written notice to each other through the Joint Patent Committee
of the preparation of internal invention disclosures or of any significant
Technology developed
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by its personnel or that of its Affiliates in connection with the Research
Collaboration. The party who owns an invention pursuant to Section 7.1 shall
determine at its sole discretion whether or not an invention is patentable. An
invention which the originating party determines should be maintained as a trade
secret shall not be deemed a patentable invention. Where an invention is made
jointly, disputes as to whether or not an invention is patentable shall be
referred to the Joint Patent Committee. No party shall publish any of the data
or information arising from the Research Collaboration without providing to the
other including, but not limited to, drafts of manuscripts for publication,
posters, abstracts and presentation materials prior to publication. During the
term of the Research Collaboration the Joint Patent Committee shall review and
determine whether particular data and information should be published in
scientific journals, at conferences or the like. After the Research
Collaboration has terminated, the parties shall cooperate to ensure that
publications related to data or information arising from the Research
Collaboration are reviewed by the other parties prior to publication. Upon
receiving the materials the receiving parties shall have sixty (60) days from
the date received to review and provide comments to the other parties. If no
comments are received within sixty (60) days, the party giving notice shall be
free to proceed with publication.
7.2.8 Assumption of Rights by Other Party. In the event that Biosource,
DAS or TDCC desires to decline responsibility for obtaining or maintaining
Patent Rights in a country for any of its Technology that is discovered in the
course of the Research Collaboration, such party will notify the other parties
before taking such action and, upon request, will allow another party to assume
responsibility for, and all expenses relating to, the relevant Patent Rights in
those countries; provided, however, that neither TDCC, DAS nor Biosource shall
have the obligation to permit another party to seek patent protection for any
Technology that it has decided, in its discretion, to maintain as a trade
secret. In the event that TDCC, DAS or Biosource desires to cease further
payment of patent-related expenses for Patent Rights jointly owned in any
country, it may assign to the other all rights in such Patent Rights in such
country and thereafter have no further obligation to pay such expenses. The
party assigning rights shall retain an immunity from suit under such Patent
Rights for it and its Affiliates (including in the case of TDCC, DAS and DAS
Affiliates, and in the case of DAS, TDCC and Affiliates of TDCC), but forfeits
any rights to license or enforce such Patent Rights.
7.2.9 Cooperation. The parties shall cooperate fully in the preparation,
filing, prosecution, and maintenance (including, without limitation,
interference proceedings, opposition proceedings, litigation, reissues and
re-examinations) of all Patent Rights, claiming patentable inventions discovered
in the course of the Research Collaboration. Such cooperation includes, without
limitation, (i) promptly executing all papers and instruments, or requiring its
employees, consultants, and agents to execute such papers and instruments, as
reasonable and appropriate so as to enable one or more of Biosource, DAS and
TDCC to file, prosecute, and maintain such Patent Rights in
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any country; (ii) promptly informing the other party of matters that may affect
the preparation, filing, prosecution, or maintenance of any such Patent Rights;
and (iii) where appropriate, coordinate the timing of filings of patent
application so to avoid situations which are deleterious to the preparation,
filing, or prosecution of any such Patent Rights.
7.3 Third Party Infringement.
7.3.1 Infringement of Biosource Patent Rights in TDCC Field/Discovery
Technology Owned by Biosource. During the term of the Agreement, in the event
that a party becomes aware of the reasonable probability of an infringement of
Biosource Patent Rights in the TDCC Field relating to Discovery Technology Owned
by Biosource and its Affiliates, under this Agreement, such party shall provide
prompt written notice to the other parties regarding such infringement.
Biosource and TDCC shall consult with each other prior to instituting an
infringement suit or taking other appropriate action. Biosource has ninety (90)
days after written notice of such alleged infringement, to determine and notify
TDCC in writing if Biosource will bring an action to abate the alleged
infringement. The parties will have the rights as follows:
(a) If the alleged infringement occurs during the period of
Research Collaboration and Biosource determines that it will
not bring an action, then TDCC is free to take legal action to
abate the alleged infringement without Biosource, except that
Biosource shall provide reasonable assistance to TDCC in
pursuing the action. Biosource shall execute whatever
documents are necessary to enable TDCC to pursue such
infringement action in its name if so desired and shall
communicate to TDCC terms on which Biosource would approve
settlement of such action. TDCC shall have sole control of the
abating activities, provided TDCC acts in good faith to
preserve the right title and interest in and to Discovery
Technology Owned by Biosource and the related Biosource Patent
Rights; and provided further that any settlement shall require
the consent and approval of Biosource, which consent and
approval shall not be unreasonably withheld. In the event a
counterclaim is brought or settlement offer is made by the
Third Party to the dispute, TDCC and Biosource shall consult
with regard to any action to be taken. If there is any
recovery as a result of the litigation, first TDCC and then
Biosource shall be entitled to recover all of its costs
incurred in the litigation, and if the recovery exceeds such
costs, Biosource shall share the greater of fifteen percent
(15%) or pro rata compensatory damages based on the parties'
relative participation in the costs and expenses attributable
to the litigation, but TDCC shall have the right to all
punitive damages.
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(b) If the alleged infringement occurs after or continues after
the period of Research Collaboration and Biosource determines
that it will not bring an action, then Biosource and TDCC
shall negotiate in good faith an adjustment of royalties
payable by TDCC under Section 6.4 in an amount appropriate in
light of the injury TDCC and its sublicensees suffer due to
the unabated infringement.
(c) If Biosource informs TDCC that it will bring an action, Biosource
shall be responsible for all costs of the litigation and shall have the right to
all compensatory and punitive damages. Biosource shall keep TDCC reasonably
apprised to the status of the litigation and will not settle such litigation
without consulting with TDCC. If Biosource grants a settlement to a Third Party
on terms overall more favorable than terms of the license of such Patent Rights
in this Agreement to TDCC, TDCC and Biosource shall negotiate in good faith to
determine an appropriate adjustment in royalties pursuant to Section 6.4.7.
7.3.2 Infringement of Biosource Patent Rights in TDCC Field/Product
Technology Owned by Biosource. During the term of this Agreement, in the event
that a party becomes aware of the reasonable probability of an infringement of
Biosource Patent Rights in the TDCC Field relating to Product Technology Owned
by Biosource and its Affiliates under this Agreement, such party shall provide
prompt written notice to the other parties regarding such infringement.
Biosource and TDCC shall consult with each other prior to instituting an
infringement suit or taking other appropriate action. Biosource has ninety (90)
days after written notice of such alleged infringement, to determine and notify
TDCC in writing if Biosource will bring an action to abate the alleged
infringement. The parties will have the rights as follows: (i) If Biosource
determines that it will not bring an action, then TDCC is free to take legal
action to abate the alleged infringement without Biosource, except that
Biosource shall provide reasonable assistance to TDCC in pursuing the action.
Biosource shall execute whatever documents are necessary to enable TDCC to
pursue such infringement action in its name if so desired and shall communicate
to TDCC terms on which Biosource would approve settlement of such action. TDCC
shall have sole control of the abating activities, provided TDCC acts in good
faith to preserve the right title and interest in and to Product Technology
Owned by Biosource and the related Biosource Patent Rights; and provided further
that any settlement shall require the consent and approval of Biosource, which
consent and approval shall not be unreasonably withheld. In the event a
counterclaim is brought or settlement offer is made by the Third Party to the
dispute, TDCC and Biosource shall consult with regard to any action to be taken.
TDCC shall have the right to all compensatory and punitive damages. (ii) If
Biosource informs TDCC that it will bring an action, TDCC may join the action at
its sole option and expense. Biosource will not settle such litigation without
consulting with TDCC. If Biosource grants a settlement to a Third Party on terms
overall more favorable than terms of the license of such Patent Rights in this
Agreement to TDCC, TDCC and
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Biosource shall negotiate in good faith to determine an appropriate adjustment
in royalties pursuant to Section 6.4.7. The parties shall share any damages in
the same proportion as the parties' relative participation in the costs and
expenses attributable to the litigation.
7.3.3 Infringement of TDCC Patent Rights in Biosource Field/Product
Technology Owned by TDCC. During the term of this Agreement, in the event that a
party becomes aware of the reasonable probability of an infringement of TDCC
Patent Rights in the Biosource Field relating to Product Technology Owned by
TDCC, such party shall provide prompt written notice to the other parties
regarding such infringement. TDCC and Biosource shall consult with each other
prior to instituting an infringement suit or taking other appropriate action.
During the term of the Research Collaboration, TDCC has ninety (90) days after
written notice of such alleged infringement, to determine and notify Biosource
in writing if TDCC will bring an action to abate the alleged infringement. The
parties will have the rights as follows: (i) If TDCC determines that it will not
bring an action, then Biosource is free to take legal action to abate the
alleged infringement without TDCC, except that TDCC shall provide reasonable
assistance to Biosource in pursuing the action. TDCC shall execute whatever
documents are necessary to enable Biosource to pursue such infringement action
in its name if so desired and shall communicate to Biosource terms on which TDCC
would approve settlement of such action. Biosource shall have sole control of
the abating activities, provided Biosource acts in good faith to preserve the
right title and interest in and to Product Technology Owned by TDCC and the
related TDCC Patent Rights and further provided that any settlement shall
require the consent and approval of TDCC, which consent and approval shall not
be unreasonably withheld. In the event a counterclaim is brought or settlement
offer is made by the Third Party to the dispute, TDCC and Biosource shall
consult with regard to any action to be taken. Biosource shall have the right to
all compensatory and punitive damages. (ii) If TDCC informs Biosource that it
will bring an action, Biosource may join the action at its sole option and
expense. The parties shall share any damages in the same proportion as the
parties' relative participation in the costs and expenses attributable to the
litigation
7.3.4 Infringement of DAS Patent Rights. During the term of this
Agreement, in the event that all or a portion of the Product Technology Owned by
TDCC is transferred to DAS, whereby DAS is paying royalties directly to
Biosource instead of through TDCC and in the event that a party becomes aware of
the reasonable probability of an infringement of DAS Patent Rights in the
Biosource Field relating to Product Technology Owned by DAS under this
Agreement, such party shall provide prompt written notice to the other parties
regarding such infringement. DAS and Biosource shall consult with each other
prior to instituting an infringement suit or taking other appropriate action.
DAS has ninety (90) days after written notice of such alleged infringement, to
determine and notify Biosource in writing if DAS will bring an action to abate
the alleged infringement. The parties will have the rights as follows: (i) If
DAS determines that it will not bring an action, then Biosource is free to take
legal
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action to abate the alleged infringement without DAS, except that DAS shall
provide reasonable assistance to Biosource in pursuing the action. DAS shall
execute whatever documents are necessary to enable Biosource to pursue such
infringement action in its name if so desired and shall communicate to Biosource
terms on which DAS would approve settlement of such action. Biosource shall have
sole control of the abating activities, provided Biosource acts in good faith to
preserve the right title and interest in and to Product Technology Owned by DAS
and the related DAS Patent Rights and further provided that any settlement shall
require the consent and approval of DAS, which consent and approval shall not be
unreasonably withheld. In the event a counterclaim is brought or settlement
offer is made by the Third Party to the dispute, DAS and Biosource shall consult
with regard to any action to be taken. Biosource shall have the right to all
compensatory and punitive damages. (ii) If DAS informs Biosource that it will
bring an action, Biosource may join the action at its sole option and expense.
The parties shall share any damages in the same proportion as the parties'
relative participation in the costs and expenses attributable to the litigation.
7.3.5 Third Party Infringement after the Research Collaboration. Following
the term of the Research Collaboration and subject to Section 7.3.1, Biosource
shall have the sole right to decide whether to institute an infringement suit or
take other appropriate action with respect to an infringement of Discovery
Technology Owned by Biosource covered by Biosource Patent Rights. During the
term of this Agreement, Biosource and its Affiliates shall have the sole right
to decide whether to institute an infringement suit or take other appropriate
action with respect to an infringement of Production Technology Owned by
Biosource covered by Biosource Patent Rights. During the term of this Agreement,
TDCC shall have the sole right to decide whether to institute an infringement
suit or take other appropriate action with respect to an infringement of the
Production Technology Owned by TDCC and covered by TDCC Patent Rights, and DAS
shall have the sole right to decide whether to institute an infringement suit or
take other appropriate action with respect to an infringement of the Discovery
Technology and Production Technology Owned by DAS and covered by DAS Patent
Rights. With respect to any infringement suit instituted during the term of the
Research Collaboration but continuing after expiration of the term of the
Research Collaboration, the provisions of this Section 7.3 shall continue to be
applicable until the conclusion of such suit. If the party owning Patent Rights
determines it will not bring an action to abate infringement and the
infringement continues after the period of Research Collaboration, Biosource and
TDCC shall negotiate in good faith an adjustment of royalties payable by the
licensee of such Patent Rights under Section 6.4, if TDCC is licensee, or
Section 6.5, if Biosource is the licensee, in an amount appropriate in light of
the injury the licensee suffers due to the unabated infringement. If a party
owning Patent Rights grants a settlement to a Third Party on terms overall more
favorable than terms of the license of such Patent Rights in this Agreement, the
parties to this Agreement shall negotiate in good faith to determine whether an
adjustment in royalties pursuant to
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Section 6.4.7, if TDCC is licensee, or Section 6.5.7, if Biosource is licensee,
is appropriate.
7.4 Infringement of Third Party Rights by TDCC or DAS.
7.4.1 Freedom to Practice. If TDCC should be of the reasonable opinion
that TDCC or DAS cannot develop, make, import, use, market and/or sell a TDCC
Product without infringing a Third Party's patent, and where such infringement
arises solely and directly from the use of Discovery Technology or Production
Technology Owned by Biosource licensed hereunder to TDCC, or infringement arises
solely and directly from the use of Product Technology Owned by TDCC under this
Agreement, it shall notify Biosource. TDCC and Biosource then shall seek an
opinion of patent counsel acceptable to TDCC and Biosource and shall share the
costs thereof. If such patent counsel concurs with the opinion of TDCC, TDCC
shall endeavor to secure a license for TDCC and its sublicensees from the Third
Party. TDCC and Biosource shall re-negotiate the royalties and milestone
payments in Article 6 to deduct any additional royalties or costs that TDCC or
DAS may have incurred in obtaining freedom to operate for the Discovery
Technology or Production Technology Owned by Biosource.
7.4.2 Third Party Suit. If TDCC and/or a party TDCC has sublicensed are
sued for patent infringement of any Third Party patents and said infringement
arises out of the development, manufacture, use, offer for sale, sale or
importation of TDCC Products, and where such infringement arises solely and
directly from the use of Discovery Technology or Production Technology Owned by
Biosource licensed hereunder to TDCC, or solely and directly from Product
Technology Owned by TDCC under this Agreement, the parties shall promptly meet
to discuss the course of action to be taken to resolve or defend any such
infringement litigation. In such event, TDCC or the party TDCC sublicensed, as
appropriate, shall determine the course of action with regard to such
infringement litigation in its sole discretion, and Biosource shall provide TDCC
and/or the sublicensee of TDCC with such assistance as is reasonably necessary
and shall cooperate in the defense of any such action. In the event that there
is a settlement to the litigation, or TDCC or the sublicensee take a license to
the Third Party technology, TDCC and Biosource shall re-negotiate the royalties
and milestone payments in Article 6 to in light of any additional royalties or
costs that TDCC or DAS may have incurred in obtaining freedom to operate for the
Discovery Technology Owned and Production Technology by Biosource.
7.4.3 Except as otherwise noted, the parties shall bear their own costs
and expenses arising in connection with any of the activities described in
Subsections 7.4.1 and 7.4.2 hereof.
7.5 Infringement of Third Party Rights by Biosource Product.
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7.5.1 Freedom to Operate. If Biosource should be of the reasonable opinion
that it cannot develop, make, import, use, market and/or sell a Biosource
Product, where Biosource is paying royalties to TDCC for such Products under
this Agreement, without infringing a Third Party's patent, and where such
infringement arises solely and directly from the use of Production Technology
Owned by DAS or Product Technology Owned by TDCC and its Affiliates licensed
hereunder, it shall notify TDCC and DAS, as appropriate. The parties then shall
seek an opinion of patent counsel acceptable to the parties and shall share the
costs thereof. If such patent counsel concurs with Biosource's opinion,
Biosource shall endeavor to secure a license from the Third Party. TDCC and
Biosource shall re-negotiate the royalty payments in Article 6 in light of any
additional royalties or costs that Biosource may have incurred in obtaining
freedom to operate for the Production Technology Owned by DAS or Product
Technology Owned by TDCC.
7.5.2 Third Party Suit. If Biosource is sued for patent infringement of
any Third Party patents and such infringement arises out of the development,
manufacture, use, offer for sale, sale or importation of Biosource Products,
where Biosource is paying royalties to TDCC for such Products under this
Agreement and where such infringement arises solely and directly from the use of
Production Technology Owned by DAS or Product Technology Owned by TDCC licensed
to Biosource hereunder, the parties shall promptly meet to discuss the course of
action to be taken to resolve or defend any such infringement litigation. In
such event, Biosource shall determine the course of action with regard to such
infringement litigation in its sole discretion, and TDCC and/or DAS, as
appropriate, shall provide Biosource with such assistance as is reasonably
necessary and shall cooperate in the defense of any such action. In the event
that there is a settlement to the litigation or Biosource takes a license to the
Third Party technology, TDCC and Biosource shall re-negotiate the royalty
payments in Article 6 to in light of any additional royalties or costs that
Biosource may have incurred in obtaining freedom to operate for the Production
Technology Owned by DAS or Product Technology Owned by TDCC.
7.5.3 Except as otherwise noted, the parties shall bear all the costs and
expenses arising in connection with any of the activities described in Sections
7.5.1 and 7.5.2 hereof.
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8. RESEARCH MATERIALS
8.1 Ownership of Research Materials. During the term of the Research
Collaboration, one party (the "Provider") may transfer to the other party (the
"Recipient") certain of its Research Materials. Each party, when a Recipient,
acknowledges and agrees that such Research Materials are and shall be Owned by
the Provider. The Recipient will execute and deliver any documents of assignment
or conveyance to effectuate the ownership rights of the Provider in such
Research Materials. Specifically, TDCC and DAS acknowledge and agree that all
Research Materials Owned by Biosource and provided to TDCC or DAS during the
term of the Research Collaboration, including without limitation all Biosource
libraries of biological materials or chemical compounds are proprietary to and
Owned by Biosource and are or may be covered by claims of Biosource Patent
Rights. TDCC or DAS may provide Research Materials to the Research
Collaboration. Biosource acknowledges and agrees that all Research Materials
Owned by TDCC or DAS provided to Biosource during the term of the Research
Collaboration, including without limitation all TDCC or DAS libraries of
biological materials or chemical compounds are proprietary to and Owned by the
Provider (either TDCC or DAS) and are or may be covered by claims of TDCC Patent
Rights or DAS Patent Rights.
8.2 Use and Transfer of Research Materials. Except as otherwise agreed
by the Research Committee, each party, when a Recipient, agrees to use Research
Materials provided by the Provider solely for use in the course of the Research
Collaboration and shall not distribute such Research Materials to any Third
Party other than its employees and consultants or contractors who are working on
the Research Collaboration. Recipient agrees (i) not to transfer such Research
Materials to any Third Party without the prior written consent of the Provider
unless such transfer is made pursuant to the Form of Material Transfer Agreement
attached hereto as Exhibit D, (ii) to permit access to the Research Materials
only to its employees and consultants requiring such access, (iii) to inform
such employees and consultants of the proprietary nature of the Research
Materials, and (iv) to take reasonable precautions, at least as stringent as
those observed by Recipient to protect its own similar proprietary materials, to
ensure that such employees and consultants observe the obligations of Recipient
under this Section.
8.3 Disposition of Unused Research Materials. At the request of
Provider, each party, when a Recipient, will return or destroy any unused
Research Materials furnished by Provider.
8.4 Compliance with Law. Each party, when a Recipient, agrees to comply
with all federal, state, and local laws and regulations applicable to the use,
storage, disposal, and transfer of Research Materials furnished by Provider,
including without
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limitation the Toxic Substances Control Act (15 USC 2601 et seq.) and
implementing regulations (in particular, 40 C.F.R. 720.36), the Food, Drug, and
Cosmetic Act (21 USC 301 et seq.) and implementing regulations, and all Export
Administration Regulations of the Department of Commerce. Recipient assumes sole
responsibility for any violation of such laws or regulations by Recipient or any
of its Affiliates or Sublicensees.
8.5 Limitation of Liability. Any Research Materials delivered pursuant
to this Agreement are understood to be experimental in nature and may have
hazardous properties. Each party, when a Recipient will assume that the Research
Materials are dangerous and will use appropriate precautions. PROVIDER MAKES NO
REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE RESEARCH MATERIALS FURNISHED TO RECIPIENT. THERE
ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, OR THAT THE USE OF THE RESEARCH MATERIALS WILL NOT INFRINGE
ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY.
9. CONFIDENTIALITY
9.1 Nondisclosure Obligations. During the term of this Agreement and for
a period of ten (10) years thereafter, the parties shall maintain in confidence
and use only for purposes specifically authorized under this Agreement the
Confidential Information received from another party. A party disclosing
Confidential Information shall take reasonable steps to identify the information
as confidential at the time of the initial disclosure of same. To the extent it
is reasonably necessary or appropriate to fulfill its obligations or exercise
its rights under this Agreement: (i) a party may disclose Confidential
Information to its Affiliates, sublicensees, prospective sublicensees,
consultants, and contractors, on a need-to-know basis and on condition that such
entities or persons agree to restrictions on use and to keep confidential this
Confidential Information consistent with the obligations of the party receiving
it under this Agreement, provided, that, when the disclosure of Confidential
Information to a Third Party pursuant to this Section 9.1 will be limited in
scope, the duration of the obligation of confidentiality may be less restrictive
than the parties to this Agreement have accepted, but in no event shall such
obligation be less stringent than those the party to this Agreement receiving
the Confidential Information and disclosing same to the Third Party requires to
protect its own Confidential Information in like circumstances; and (ii)
Confidential Information may be disclosed by a party or its sublicensees to
government or other regulatory authorities to the extent that such disclosure is
reasonably necessary to exercise rights granted under this Agreement.
9.2 Limitation. The obligations under Section 9.1 shall not apply to any
information that: (i) is or becomes part of the public domain other than by
unauthorized
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acts of the party obligated not to disclose such Confidential Information or its
Affiliates or sublicensees; (ii) can be shown by written documents to have been
disclosed to the receiving party or its Affiliates or sublicensees by a Third
Party, provided such information was not obtained by such Third Party directly
or indirectly from another party to this Agreement pursuant to a confidentiality
agreement; (iii) prior to disclosure under this Agreement, was already in the
possession of the receiving party or its Affiliates or sublicensees, provided
such information was not obtained directly or indirectly from another party to
this Agreement pursuant to a confidentiality agreement; (iv) can be shown by
written documents to have been independently developed by the receiving party or
its Affiliates without breach of any of the provisions of this Agreement; or (v)
is disclosed by the receiving party pursuant to interrogatories, requests for
information or documents, subpoena, civil investigative demand issued by a court
or governmental agency or as otherwise required by law, provided, however, that
the receiving party notifies the party, which originally provided such
information or documents, reasonably promptly upon receipt thereof, giving such
other party sufficient advance notice to permit it to seek a protective order or
other similar order with respect to such Confidential Information, and provided,
further, that the only that portion of the Confidential Information is furnished
which the party is advised by counsel is legally required, whether or not a
protective order or other similar order is obtained.
9.3 Samples. Samples of plants, seeds, nucleotide sequences, other
biological targets or materials, or compounds identified, sequenced,
synthesized, purified or developed in the course of the Research Collaboration
shall not be supplied or sent by either party to any Third Party unless
protected by an appropriate materials transfer agreement similar to the one in
Exhibit D. Only upon the prior written consent of the owner of such samples and
with the specific terms and conditions of such transfer, may samples of the
other party's commercial Products be provided to any Third Party. For avoidance
of doubt, it is understood that Products sold commercially, as permitted under
the rights granted to a party under this Agreement are not samples and are not
subject to the restrictions in this Section 9.3.
9.4 Protection of Proprietary Technology.
9.4.1 Discovery Technology. TDCC agrees to undertake reasonable
precautionary measures to ensure that the Discovery Technology Owned by
Biosource is not used in research and development activities outside the TDCC
Field nor for any purpose other than discovery and development of Products and
other uses permitted by this Agreement. Only employees, collaborators,
contractors, sublicensees and agents of TDCC and its Affiliates, DAS and DAS
Affiliates, subject to written confidentiality obligations, shall be afforded
access to Discovery Technology and Research Materials Owned by Biosource. TDCC
shall consult with Biosource upon request to discuss the adequacy of precautions
taken to protect Discovery Technology and Research Materials Owned by Biosource
and shall implement additional precautions as appropriate. In the
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event Biosource notifies TDCC of one or more Third Parties to whom Discovery
Technology Owned by Biosource should not be disclosed in order to protect
proprietary interests of Biosource, TDCC shall not disclose nor permit
disclosure of Discovery Technology Owned by Biosource to such Third Parties
without the prior written consent of Biosource. Biosource shall not unreasonably
withhold consent to such a disclosure.
9.4.2 Proprietary Technology of TDCC or DAS. Biosource agrees to undertake
reasonable precautionary measures to ensure that the Technology Owned by TDCC or
DAS is not used in research and development activities outside the Biosource
Field nor for any purpose other than the Research Collaboration and other uses
permitted by this Agreement. Only employees, collaborators, sublicensees and
agents of Biosource and its Affiliates, subject to written confidentiality
obligations, shall be afforded access to Technology and Research Materials Owned
by TDCC. TDCC or DAS may from time to time notify Biosource of Technology Owned
by TDCC or DAS which is deemed to require additional precautions to prevent
divulgation of same. Technology Owned by TDCC or DAS related to Photorhabdus,
Xenorhabdus, Bacillus thuringiensis, and Saccharopolyspora spinosa and Demeter
Technology is deemed to be particularly sensitive. In addition, Biosource shall
consult with TDCC or DAS upon request to discuss the adequacy of other
precautions taken to protect particularly sensitive Technology Owned by TDCC or
DAS and shall implement additional precautions as appropriate. In the event TDCC
or DAS notifies Biosource of one or more Third Parties to whom Technology Owned
by TDCC or DAS should not be disclosed in order to protect proprietary interests
of TDCC or DAS, Biosource shall not disclose nor permit disclosure of Technology
Owned by TDCC or DAS to such Third Parties without the prior written consent of
TDCC or DAS, as applicable. TDCC and DAS shall not unreasonably withhold consent
to such a disclosure.
9.5 Firewall. During the term of the Research Collaboration, TDCC and
DAS shall establish procedures to keep in separate files and appropriately label
documents containing Confidential Information pertaining to Discovery Technology
Owned by Biosource and Confidential Information pertaining to Transient
Transformation Technology Owned by a Third Party. TDCC and DAS shall take
reasonable precautions to avoid disclosure to Biosource's employees and agents
Confidential Information pertaining to Transient Transformation Technology Owned
by a Third Party, unless Biosource is given prior notice of the nature of such
Confidential Information and has agreed to receive same subject to restrictions
imposed by the Third Party.
9.6 Injunctive Relief. The parties hereto understand and agree that
remedies at law may be inadequate to protect against any breach of any of the
provisions of this Article 9 by either party or their employees, agents,
officers or directors or any other person acting in concert with it or on its
behalf. Accordingly, each party shall be entitled to the granting of injunctive
relief by a court of competent jurisdiction against
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any action that constitutes any such breach of this Article 9.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS
10.1 Representations and Warranties of Biosource. Biosource represents
and warrants to TDCC that:
10.1.1 Biosource is a corporation duly organized, validly existing and in
corporate good standing under the laws of California.
10.1.2 Biosource has the legal right, authority and power to enter into
this Agreement, and to extend the rights and licenses granted to TDCC in this
Agreement, including ownership of Biosource Patent Rights.
10.1.3 Biosource has taken all necessary action to authorize the
execution, delivery and performance of this Agreement.
10.1.4 This Agreement shall constitute a valid and binding obligation of
Biosource enforceable in accordance with its terms.
10.1.5 The performance of obligations under this Agreement by Biosource
will not conflict with its charter documents or result in a breach of any
agreements, contracts or other arrangements to which it is a party as of the
Effective Date.
10.1.6 Biosource is not aware of any claims or assertion that the
performance of Biosource's obligations under this Agreement, including without
limitation the delivery and use of Technology, Discovery Technology, Transient
Transformation Technology, Viral Vector Technology, Production Technology or
Product Technology Owned by Biosource, will infringe any Valid Claims of any
issued patent or claims in any published, pending patent application of a Third
Party.
10.1.7 All issued patents and all patent applications covering Technology,
Discovery Technology, Transient Transformation Technology, Viral Vector
Technology, Production Technology, and Product Technology licensed by Biosource
to TDCC hereunder (i) are validly Owned by Biosource, and (ii) were obtained
(including filed and prosecuted) without fraud and, (iii) to the best knowledge
and reasonable belief of Biosource, after such inquiry as would be conducted by
a reasonable business person under like circumstances, are believed to be valid.
10.1.8 Biosource has delivered to TDCC its financial statements for the
period ended December 31, 1997, and for the calendar quarter ended June 30,
1998. These financial statements of Biosource have been prepared in accordance
with generally accepted accounting principles, practices and procedures
consistently applied through the periods reported upon.
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10.1.9 No representation or warranty by Biosource in this Agreement or
any documents provided hereunder (including, without limitation, any Exhibits
and Schedules to this Agreement) contains any untrue statement or omits to state
any material fact necessary to make the statements contained herein and therein
(taken together), in the light of the circumstances under which they are made,
not misleading.
10.1.10 Biosource has in all material respects performed all obligations
required to be performed by it under, and is not in default in any material
respect under, or in violation in any material respect of, its Articles of
Incorporation or Bylaws or any agreement, lease, mortgage, note, bond,
indenture, license, or other documents or undertaking, oral or written, to which
it is a party or by which it is bound, or by which it or any of its properties
or assets may be materially affected. Biosource is not in violation or default
in any material respect of any judicial, administrative, or governmental order,
writ, rule, regulation, statute injunction, or decree.
10.1.11 Biosource does not have any Affiliate, subsidiary or any interest
in any undisclosed business enterprise relevant to the subject matter of the
Research Collaboration or this Agreement.
10.1.12 The representations and warranties set forth in Sections 10.1.1 to
10.1.11, shall survive the closing of the transactions contemplated in this
Agreement.
10.1.13 In the event any representation or warranty set forth in Sections
10.1.1 to 10.1.11 is determined during the term of this Agreement to be false in
any respect which is material to this Agreement, this shall be considered
grounds for rescission under Section 12.5.4, if the representation or warranty
was false as of the Effective Date.
10.2 Representations and Warranties of TDCC. TDCC represents and
warrants to Biosource that:
10.2.1 TDCC is a corporation duly organized, validly existing and in
corporate good standing under the laws of Delaware.
10.2.2 TDCC has the legal right, authority and power to enter into this
Agreement, and to extend the rights and licenses granted to Biosource in this
Agreement.
10.2.3 TDCC has taken all necessary action to authorize the execution,
delivery and performance of this Agreement.
10.2.4 This Agreement shall constitute a valid and binding obligation of
TDCC enforceable in accordance with its terms.
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10.2.5 The performance of its obligations under this Agreement will not
conflict with TDCC's charter documents or result in a breach of any agreements,
contracts or other arrangements to which it is a party.
10.2.6 The representations and warranties set forth in Section 10.2.4
shall survive the closing of the transactions contemplated in this Agreement.
10.2.7 In the event any representation or warranty set forth in Section
10.2.4 is determined to be false as of the Effective Date in any respect
material to this Agreement, this shall be considered a material breach of this
Agreement.
10.3 Representations and Warranties of DAS. DAS represents and warrants
to Biosource that:
10.3.1 DAS is a limited liability company duly organized and validly
existing under the laws of Delaware.
10.3.2 DAS has the legal right, authority and power to enter into this
Agreement, and to extend the rights and licenses granted to Biosource in this
Agreement.
10.3.3 DAS has taken all necessary action to authorize the execution,
delivery and performance of this Agreement.
10.3.4 This Agreement shall constitute a valid and binding obligation of
DAS enforceable in accordance with its terms.
10.3.5 The performance of its obligations under this Agreement will not
conflict with its charter documents or result in a breach of any agreements,
contracts or other arrangements to which it is a party.
10.3.6 DAS is not aware of any claims that the performance of DAS's
obligations under this Agreement, including without limitation the delivery and
use of the Production Technology Owned by DAS, will infringe any Valid Claims of
any issued patent of a Third Party.
10.3.7 All issued patents and all patent applications covering Technology
licensed by DAS to Biosource as contemplated hereunder (i) are validly Owned by
DAS, and (ii) were obtained (including filed and prosecuted) without fraud and,
(iii) to the actual knowledge of DAS after such inquiry as would be conducted by
a reasonable business person under like circumstances, are valid.
10.3.8 The representations and warranties set forth in Section 10.3.4
shall survive the closing of the transactions contemplated in this Agreement.
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10.3.9 In the event any representation or warranty set forth in Section
10.3.4 is determined to be false as of the Effective Date in any respect
material to this Agreement, this shall be considered a material breach of this
Agreement.
10.4 Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS AGREEMENT, NO PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY OF ITS
RESPECTIVE TECHNOLOGY, PATENT RIGHTS, GOODS, SERVICES OR OTHER SUBJECT MATTER OF
THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE
FOREGOING.
10.5 Limited Liability. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT
OR OTHERWISE TO THE CONTRARY, NEITHER BIOSOURCE NOR TDCC NOR DAS WILL BE LIABLE
WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT,
NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY
PUNITIVE, EXEMPLARY, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS.
10.6 Covenants.
10.6.1 No party to this Agreement shall after the Effective Date enter
into any agreements, contracts or other arrangements that would cause such party
or any of its Affiliates to be in material breach of this Agreement. In the
event that a party enters into such an agreement, contract or other arrangement
which conflicts with obligations of said party under this Agreement or rights of
another party to this Agreement and has or is likely to have a material adverse
impact upon rights of another party pursuant this Agreement, such agreement,
contract or other arrangement shall itself be considered a material breach of
this Agreement.
10.6.2 Biosource shall use reasonable best efforts to assure that
Biosource Patent Rights licensed to TDCC pursuant to this Agreement are at all
times during the term of this Agreement: (i) validly Owned by Biosource; (ii)
are filed and prosecuted without fraud; and (iii) are in the reasonable opinion
of Biosource believed valid and enforceable.
11. INDEMNITY
11.1 TDCC Indemnity Obligations. TDCC agrees to defend, indemnify and
hold Biosource, its Affiliates and their respective directors, officers,
employees and agents harmless from all claims, losses, damages or expenses
arising as a result of: (a)
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actual or asserted violations of any applicable law or regulation by TDCC, its
Affiliates or sublicensees by virtue of which the TDCC Products manufactured,
distributed or sold hereunder shall be alleged or determined to be adulterated,
misbranded, mislabeled or otherwise not in compliance with any applicable law or
regulation; (b) claims for bodily injury, death or property damage attributable
to the manufacture, distribution, sale or use of the TDCC Products by TDCC, its
Affiliates or sublicensees or use of the TDCC Products by Third Parties; (c)
claims arising from allegations that the development, manufacture, sale, offer
for sale, distribution or importation of a TDCC Product infringes or abridges
any Third Party rights in copyrights, patents, trade secrets, or any other
proprietary or contractual right, except as provided in Section 7.4 and/or where
such infringement claim arises from the use of Research Materials provided by
Biosource, the use of Discovery Technology Owned by Biosource, Transient
Transformation Technology Owned by Biosource, Production Technology Owned by
Biosource, Product Technology Owned by Biosource and all Patent Rights related
thereto Owned by Biosource; or (d) a product recall ordered by a governmental
agency or required by a confirmed TDCC Product failure as reasonably determined
by the parties hereto.
11.2 Limitation on TDCC Indemnity Obligations. Biosource, its Affiliates
and their respective directors, officers, employees and agents shall not be
entitled to the indemnities set forth in Section 11.1 where the claim, loss,
damage or expense for which indemnification is sought to the extent it was
caused by a grossly negligent act or intentional act of misconduct or omission
by Biosource, its directors, officers, employees or authorized agents.
11.3 Biosource Indemnity Obligations. Biosource agrees to defend,
indemnify and hold TDCC, its Affiliates, DAS and DAS Affiliates and their
respective directors, officers, employees and agents harmless from all claims,
losses, damages or expenses arising as a result of: (a) actual or asserted
violations of any applicable law or regulation by Biosource, its Affiliates or
sublicensees by virtue of which the Biosource Products manufactured, distributed
or sold hereunder shall be alleged or determined to be adulterated, misbranded,
mislabeled or otherwise not in compliance with any applicable law or regulation;
(b) claims for bodily injury, death or property damage attributable to the
manufacture, distribution, sale or use of the Biosource Products by Biosource,
its Affiliates or sublicensees or use of Biosource Products by Third Parties;
(c) claims arising from allegations that the development, manufacture, sale,
offer for sale, distribution or importation of a Biosource Product infringes or
abridges any Third Party rights in copyrights, patents, trade secrets, or any
other proprietary or contractual right, except as provided in Section 7.5 and/or
such infringement claim arises from the use of Research Materials provided by
TDCC or DAS, the use of Discovery Technology Owned by DAS, Production Technology
Owned by TDCC or DAS, Product Technology Owned by TDCC and Patent Rights related
thereto; or (d) a product recall ordered by a governmental agency or required by
a confirmed Biosource Product failure as reasonably determined by the parties
hereto.
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11.4 Limitation on Biosource Indemnity Obligations. TDCC, its Affiliates,
DAS and DAS Affiliates and their respective directors, officers, employees and
agents shall not be entitled to the indemnities set forth in Section 11.3 where
the claim, loss, damage or expense for which indemnification is sought to the
extent it was caused by a grossly negligent act or intentional act of misconduct
or omission by TDCC, its Affiliates, DAS, DAS Affiliates or their respective
directors, officers, employees or authorized agents.
11.5 Procedure. If a party or any of its Affiliates or their respective
directors, officers, employees or agents (the "Indemnitee") intends to claim
indemnification under this Article 11, the Indemnitee shall promptly notify the
other party (the "Indemnitor") of any loss, claim, damage, liability or action
in respect of which the Indemnitee intends to claim such indemnification, and
the Indemnitor shall assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an Indemnitee shall have
the right to retain its own counsel at its own expense, if representation of
such Indemnitee by the counsel retained by the Indemnitor would be inappropriate
due to actual or potential differing interests between such Indemnitee and any
other party represented by such counsel in such proceedings. The indemnity
agreement in this Article 11 shall not apply to amounts paid in settlement of
any loss, claim, damage, liability or action if such settlement is effected
without the consent of the Indemnitor, which consent shall not be withheld
unreasonably. The failure to deliver notice to the Indemnitor within a
reasonable time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Article 11, but this failure to notify the Indemnitor
will not relieve it of any liability that it may have to any Indemnitee
otherwise than under this Article 11. The Indemnitee under this Article 11, its
employees and agents, shall cooperate fully with the Indemnitor and its legal
representatives in the investigation of any action, claim or liability covered
by this indemnification. The Indemnitor will not be liable to pay the reasonable
legal costs and attorneys' fees incurred by the Indemnitee in establishing its
claim for indemnity.
11.6 Insurance. Each party shall maintain appropriate product liability
insurance with respect to development, manufacture and sales of the Products by
such party in such amount as such party customarily maintains with respect to
sales of its other products (lower case). Each party shall maintain such
insurance for so long as it continues to manufacture or sell the Products, and
thereafter for so long as such party maintains insurance for itself covering
such manufacture or sales. All rights of the insurer of subrogation under such
product liability insurance policy with respect to any Indemnitee under this
Article 11 and its directors, officers, employees and agents shall be waived.
12. TERM AND TERMINATION
12.1 Term of Research Collaboration.
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12.1.1 Initial Term and Extension. Unless this Agreement is extended in
accordance with the provisions of this Article 12, the initial term of the
Research Collaboration shall expire thirty-six (36) months from the Effective
Date; provided, however, that TDCC may elect, in its sole discretion, to
terminate the Research Collaboration by giving ninety (90) days advance written
notice of such termination. The term of the Research Collaboration may be
extended for from one (1) to up to twelve (12) successive twelve (12) month
periods, if TDCC, in its discretion, elects to extend the term of the Research
Collaboration. If TDCC wishes to extend the Research Collaboration, TDCC shall
deliver written notice to Biosource at least six (6) months prior to the
expiration of the initial term of the Research Collaboration or any extension
thereof definitively stating that TDCC intends to extend the Research
Collaboration at the end of the current term.
12.1.2 Termination by Biosource. In the event during the second or later
Contract Years of the Research Collaboration, Biosource has achieved all
milestones under Section 6.2(a) & (b) applicable to the first Contract Year, but
the total amount paid to Biosource for funded research pursuant to Section 6.3.1
and milestones paid to Biosource pursuant to Section 6.2 shall fall below both:
(i) a rate of $2,000,000 (two million U.S. dollars) in the previous calendar
quarter; and (ii) less than an average of $2,500,000 per quarter for the
calendar year to date, then Biosource may request a special meeting of the
Research Committee and/or the Steering Committee to discuss steps to be taken to
increase sponsored research funding in the TDCC Field. In the discretion of
Biosource, such discussion may include the possibility of permitting Biosource
the right to collaborate with a Third Party in a part of the TDCC Field, subject
to mutually agreed terms. If the parties are not able to reach agreement on new
terms to continue the Research Collaboration satisfactory to all parties after a
90 day period of good faith negotiation, and for a second consecutive quarter
the total amount paid to Biosource for funded research pursuant to Section 6.3.1
and milestones paid to Biosource pursuant to Section 6.2 falls below the
criteria in both (i) and (ii) above, then Biosource may elect to terminate the
term of the Research Collaboration upon notice to TDCC during any period that
the criteria in both (i) and (ii) are not met in the preceding quarter and the
failure to meet these criteria is not due to a force majeure or circumstances
within the control of Biosource which substantially reduce value realized by
TDCC from any increases in funding of sponsored research.
12.1.3 Winding Down. Biosource may, in its discretion, engage in an
orderly wind-down of the Research Services, including the reassignment of the
scientists devoted thereto, during the last six (6) months of the Research
Collaboration. Biosource shall absorb all of its own costs of winding down the
Research Collaboration.
12.2 Term of Agreement. Unless this Agreement is sooner terminated in
accordance with the provisions of this Article 12, this Agreement shall expire:
(i) twenty (20) years after the Effective Date, in the event there have been no
royalties paid
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under Sections 6.4 or 6.5; or (ii) the expiration of obligations of both TDCC
and Biosource to pay royalties under Article 6.
12.3 Delivery of Technology after Expiration or Termination. After the
expiration or termination of the Research Collaboration, Biosource shall deliver
by written disclosure all Discovery Technology, Transient Transformation
Technology, Viral Vector Technology, Production Technology, and Product
Technology Owned by Biosource (including improvements thereto made during the
Research Collaboration) to TDCC, so that TDCC, DAS and sublicensees of TDCC can
fully exploit the rights granted pursuant to Article 3. Up to one (1) year after
the termination or expiration of the Research Collaboration, at the request of
TDCC, Biosource shall make available to TDCC and its sublicensees, including
DAS, Biosource employees for technical consultation to assist TDCC and its
sublicensees in scaling-up the Discovery Technology, Transient Transformation
Technology, Viral Vector Technology, Production Technology and Product
Technology Owned by Biosource licensed to TDCC hereunder. TDCC or its
sublicensees, as appropriate, shall pay to Biosource reasonable compensation for
such consultations.
12.4 Events of Default. An Event of Default shall have occurred upon:
(i) the occurrence of a material breach of this Agreement if the breaching party
fails to remedy such breach within sixty (60) days after written notice thereof
by the non-breaching party specifying the claimed particulars of the breach; or
(ii) the bankruptcy, insolvency, dissolution or winding up of a party.
12.5 Effect of an Event of Default.
12.5.1 General Remedies. Upon the occurrence of an Event of Default, the
injured party may at its option either: (i) terminate the Research Collaboration
but continue other terms of this Agreement, (ii) give notice of termination of
this Agreement and seek monetary damages, or (iii) demand specific performance
of this Agreement. Effects of termination of this Agreement for a material
breach are further described in Sections 12.5.2 and 12.5.3. The Research
Collaboration may also be terminated as provided in Sections 6.2(b) or 12.1.2 ,
which shall be the sole remedy for the matters set forth therein, but such
termination will not waive remedies for an additional Event of Default.
Regardless of whether or not a default is a material breach, the injured party
shall have the right to seek damages or other relief. Any dispute as to whether
or not an Event of Default has occurred or whether or not a breach is material
shall be subject to dispute resolution under Section 14.6 and termination shall
not be final until confirmed by judgment of the arbitrators.
12.5.2 Remedies Available to Biosource. Upon occurrence of an Event of
Default where Biosource is the injured party, TDCC will promptly pay all amounts
then properly due under Article 6 to Biosource. Provided TDCC pays to Biosource
all amounts due under Article 6, the licenses granted to TDCC under Sections
3.1, 3.2,
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3.3 and 3.6 shall be irrevocable and Biosource's remedies for breach shall be
limited to monetary damages and/or specific performance. Upon termination of the
Agreement, the Research Collaboration shall end, but Biosource may in its
discretion, engage in an orderly wind-down of Research Services. In addition,
Biosource may immediately under Sections 3.8.1, 3.8.2, 3.13.2 and 3.13.3,
terminate TDCC's rights. If payment of all amounts due under Article 6 is not
made by TDCC, subject to resolution of any dispute as to this payment in
accordance with Section 14.6, TDCC and its sublicensees shall cease to use
Technology owned by Biosource for which payment has not been made and deliver to
Biosource all documents and Research Materials received containing the
Technology Owned by Biosource related to the delinquent payments.
12.5.3 Remedies Available to TDCC. Upon occurrence of an Event of Default
where TDCC is the injured party, Biosource will promptly pay all amounts then
properly due TDCC under Article 6 including any amount overpaid for sponsored
research under Section 6.3.1. If a material breach occurs which is due to the
failure of Biosource to achieve one or more milestones as described in Section
6.2(b), TDCC shall have the right to immediately suspend payments to Biosource
otherwise due under Sections 6.2 and 6.3.1 upon giving notice of such breach .
If Biosource remedies the breach within the period in Section 12.2, TDCC shall
remit to Biosource the suspended payments which shall be deemed timely if paid
within thirty (30) days of such cure. If Biosource fails to timely cure the
breach and an Event of Default arises with respect to Section 6.2(b), TDCC's
obligations to pay Biosource the suspended amounts shall terminate and will be
deemed part of the damages TDCC is entitled to receive. If TDCC elects to
terminate the Research Collaboration or the Research Collaboration ends as a
result of termination of this Agreement, TDCC may at its sole discretion require
Biosource either to terminate Research Services immediately or engage in an
orderly wind-down of Research Services. In addition, TDCC may immediately
terminate all Biosource's rights under Section 3.13.1 and has no obligation
thereafter to disclose Technology Owned by TDCC or DAS nor to give Biosource
access to any Research Materials Owned by TDCC or DAS. If payment of all amounts
due under Article 6 are not made by Biosource, subject to resolution of any
dispute as to payment in accordance with Section 14.6, Biosource and its
sublicensees shall immediately cease to use all Technology Owned by TDCC and DAS
for which payment has not been made, and deliver to TDCC all documents and
Research Materials received containing Technology owned by TDCC or DAS.
Termination of this Agreement or the Research Collaboration by TDCC hereunder,
shall not be construed to release Biosource from any liability for damages
suffered by TDCC or DAS due to the failure of Biosource to provide all Research
Services as contemplated in the Overall Research Plan.
12.5.4 Rescission of the Agreement. In the event that it is determined by
the procedure set forth in Section 14.6 that a representation or warranty of
Biosource under Sections 10.1.1 to 10.1.11 contains as of the Effective Date an
untrue statement or omits to state any material fact which if known would have
more likely than not have caused a reasonable party in the position of TDCC to
not enter into this Agreement on
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the terms herein, TDCC may at its option rescind the Agreement. Upon such
rescission, Biosource shall cease to use all Technology Owned by TDCC and DAS
and deliver to TDCC all documents and Research Materials received containing
Technology owned by TDCC or DAS and promptly refund to TDCC the Technology
Access Fee paid under Section 6.1 and all milestone payments paid under Section
6.2 to Biosource. Upon refund to TDCC of the aforementioned payments made under
Sections 6.1 and 6.2, TDCC and its sublicensees shall cease to use Discovery
Technology Owned by Biosource and deliver to Biosource all documents and
Research Materials received containing the Discovery Technology Owned by
Biosource. TDCC may, in its discretion and at TDCC's expense, require Biosource
to engage in an orderly winding down of Research Services upon notice of
Rescission, so as to finish works in progress and complete transfer of Product
Technology and Production Technology developed during the Research
Collaboration. After rescission, TDCC shall have the perpetual, non-exclusive,
royalty-free, worldwide right to use and to sublicense its Affiliates, DAS and
DAS Affiliates to use Production Technology Owned by Biosource, which was used,
discovered or developed in the course of the Research Collaboration, for the
purpose of developing, having developed, using, having used, making, having
made, distributing for sale, selling, offering to sell, practicing, importing
and exporting TDCC Products. After rescission, TDCC shall also have the
perpetual, non-exclusive, worldwide right to use and to sublicense any entity to
use Product Technology Owned by Biosource, which was used, discovered or
developed in the course of the Research Collaboration, for the purpose of
developing, having developed, using, having used, making, having made,
distributing for sale, selling, offering to sell, practicing, importing and
exporting TDCC Products; provided, however, that any TDCC Product discovered or
manufactured pursuant to such right shall be subject to a reasonable royalty to
be negotiated, which shall be appropriately discounted relative to the royalty
payable under Section 6.4 for an exclusive license.
12.6 Effect of Expiration or Termination of Agreement. The expiration
or termination of this Agreement shall not relieve the parties of any obligation
accruing prior to such expiration or termination.
12.7 Survival of Provisions Upon Expiration. The provisions of Articles
7, 8, 9, 11, 13; and Sections 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 12.3.1,
12.3.2, 12.3.3 14.4, 14.5, 14.6, 14.8 and 14.11; and the provisions of Sections
3.1, 3.2, 3.3 and 3.4, 3.5 and 3.6 relating to rights that survive the
termination of the Research Collaboration; hereof shall survive the expiration
or termination of this Agreement.
13. PROVISIONS FOR INSOLVENCY
13.1 General. All rights and licenses granted under or pursuant to this
Agreement by Biosource to TDCC and DAS are, for all purposes of Section 365(n)
of Title 11 of the U.S. Code ("Title 11"), licenses of rights to intellectual
property as defined in Title 11. Biosource agrees during the term of this
Agreement to maintain
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and preserve any current copies of all such intellectual property which are in
existence and in its possession as of the commencement of a case under Title 11
by or against Biosource. If a case is commenced by or against Biosource under
Title 11, then Biosource (in any capacity, including debtor-in-possession) and
its successors and assigns (including, without limitation, a Title 11 Trustee)
shall, as TDCC or DAS may elect in a written request, immediately upon such
request (A) (i) perform all of the obligations provided in this Agreement to be
performed by Biosource, or (ii) provide to TDCC or DAS copies of all such
intellectual property (including all embodiments thereof) held by Biosource and
such successors and assigns as of the commencement of a case under Title 11 by
or against Biosource and from time to time thereafter, and (B) not interfere
with the rights of TDCC or DAS as provided in this Agreement, or any agreement
supplementary hereto, to such intellectual property (including all such
embodiments thereof), including any right of TDCC or DAS to obtain such
intellectual property (or such embodiment) from any other entity.
13.2 Rejection of Agreement in Title 11. If a Title 11 case is commenced
by or against Biosource and this Agreement is rejected as provided in Title 11
and TDCC elects to retain its rights hereunder as provided in Title 11, then
Biosource (in any capacity, including debtor-in-possession) and its successors
and assigns (including, without limitation, a Title 11 Trustee) shall provide to
TDCC and DAS copies of all such intellectual property (including all embodiments
thereof) held by Biosource and such successors and assigns immediately upon
TDCC's or DAS's written request therefor. Whenever Biosource or any of its
successors or assigns provides to TDCC or DAS any of the intellectual property
licensed hereunder (or any embodiment thereof) pursuant to this Article 13, TDCC
or DAS, as the case may be, shall have the right to perform or require
performance of the obligations of Biosource hereunder with respect to such
intellectual property, but neither such provision nor such performance by TDCC
or DAS shall release Biosource from any such obligation or liability for failing
to perform it; provided, however, that in such event TDCC (or DAS) shall not be
entitled to compel specific performance by Biosource under this Agreement except
to the extent of enforcing the exclusivity of the license granted hereunder.
13.3 Additional Rights. All rights, powers, remedies, obligations and
conditions of TDCC and DAS provided herein are in addition to and not in
substitution for any and all other rights, powers, remedies, obligations and
conditions of Biosource, TDCC, or DAS now or hereafter existing at law or in
equity (including, without limitation, Title 11) in the event of the
commencement of a Title 11 case by or against Biosource. TDCC and DAS, in
addition to the rights, power and remedies expressly provided herein, shall be
subject to all obligations and conditions, and shall be entitled to exercise all
other such rights and powers and resort to all other such remedies as may now or
hereafter exist at law or in equity (including, without limitation, Title 11) in
such event. The parties agree that they intend the foregoing rights and
obligations of TDCC and DAS to apply to the maximum extent permitted by law,
including without limitation for purposes of Title 11, (i) the right of access
to any intellectual property
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(including all embodiments thereof) of Biosource, or any Third Party with whom
Biosource contracts to perform an obligation of Biosource under this Agreement,
and in the case of the Third Party, which is necessary for the development,
registration and manufacture of a Product, and (ii) the right to contract
directly with any Third Party described in clause (i) in this sentence to
complete the contracted work.
14. MISCELLANEOUS
14.1 Force Majeure. No party shall be held liable or responsible to the
other parties nor be deemed to have defaulted under or breached this Agreement
for failure or delay in fulfilling or performing any term of this Agreement when
such failure or delay is caused by or results from causes beyond the reasonable
control of the affected party, including but not limited to fire, floods,
embargoes, war, acts of war (whether war is declared or not), insurrections,
riots, civil commotions, strikes, lockouts or other labor disturbances, acts of
God or acts, omissions or delays in acting by any governmental authority or
another party; provided, however, that the party so affected shall use
commercially reasonable efforts to avoid or remove such causes of
nonperformance, and shall continue performance hereunder with reasonable
dispatch whenever such causes are removed. Each party shall provide the other
parties with prompt written notice of any delay or failure to perform that
occurs by reason of force majeure. The parties shall mutually seek a resolution
of the delay or the failure to perform as noted above.
14.2 Assignment. This Agreement may not be assigned or otherwise
transferred by a party without the consent of the other parties; except, subject
to the limitations in Section 3.16, Biosource, TDCC or DAS may, without such
consent, assign its rights and obligations under this Agreement (i) to any
Affiliate, or another entity in which more than fifty percent (50%) of the
equity interest of which is owned or directly or indirectly controlled by such
party or its direct or indirect parent corporation, that is the entity that owns
all the equity interest of such party to this Agreement, or (ii) in connection
with a merger, consolidation or sale of substantially all of such party's assets
to a Third Party; provided, however, that in the event of assignment or transfer
under either (i) or (ii) above, such party's rights and obligations under this
Agreement shall be assumed by its successor in interest in any such transaction
and shall not be transferred separate from all or substantially all of its other
business assets relevant to the rights and obligations under this Agreement. In
addition, TDCC, at its discretion, may assign to DAS, DAS Affiliates, their
respective successors, or another entity in which TDCC owns or controls either
directly or indirectly more than a fifty percent (50%) equity interest, in whole
or part, the rights granted to TDCC with regard to any or all TDCC Products, and
the use of Alliance Genes in the TDCC Field, and related obligations hereunder
without consent of Biosource, while TDCC retains rights to other TDCC Products;
provided, however, that TDCC shall guarantee the performance by any such
assignee of any royalty obligation hereunder unless and until such entity enters
into a direct contract with
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Biosource confirming such obligation. Any purported assignment other than as
permitted in this Section 14.2 shall be void. Any permitted assignee shall
assume all obligations of its assignor under this Agreement.
14.3 Severability. Each party hereby agrees that it does not intend to
violate any public policy, statutory or common laws, rules, regulations, treaty
or decision of any government agency or executive body thereof of any country or
community or association of countries. Should one or more provisions of this
Agreement be or become invalid, the parties hereto shall substitute, by mutual
consent, valid provisions for such invalid provisions which valid provisions in
their economic effect are sufficiently similar to the invalid provisions that it
can be reasonably assumed that the parties would have entered into this
Agreement with such valid provisions. In case such valid provisions cannot be
agreed upon, the invalidity of one or several provisions of this Agreement shall
not affect the validity of this Agreement as a whole, unless the invalid
provisions are of such essential importance to this Agreement that it is to be
reasonably assumed that the parties would not have entered into this Agreement
without the invalid provisions, in which case, any party may immediately
terminate this Agreement upon delivery of written notice thereof to the other
parties. In the event of such termination, the parties shall negotiate in good
faith to preserve the interests of all parties and the investment made by the
parties in the Research Collaboration prior to termination.
14.4 Notices. Any consent, notice or report required or permitted to be
given or made under this Agreement by one of the parties hereto to the other
shall be in writing, delivered personally or by facsimile (and promptly
confirmed by telephone, personal delivery or courier) or courier, postage
prepaid (where applicable), addressed to such other party at its address
indicated below, or to such other address as the addressee shall have last
furnished in writing to the address or and shall be effective upon receipt by
the addressee.
If to Biosource: Biosource Technologies, Inc.
3333 Vaca Valley Parkway
Vacaville, CA 95688
Tel: 707-446-5501
Fax: 707-446-3917
Attn: President
If to TDCC: The Dow Chemical Company
2030 Willard H. Dow Center
Midland, MI 48674
Tel: 517-636-4604
Fax: 517-636-4680
Attn: Director, Biotechnology Platform
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with a copy to: The Dow Chemical Company
Patent Department
1790 Building
Midland, MI 48674
Tel: 517-636-3052
Fax: 517-636-7592
Attn: General Patent Counsel
If to DAS: Dow AgroSciences LLC
9330 Zionsville Road
Indianapolis, IN 46268-1054
Tel: 317-337-4282
Fax: 317-337-4266
Attn: General Counsel
14.5 Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
the choice of laws provisions thereof.
14.6 Dispute Resolution.
14.6.1 Negotiate. The parties agree to negotiate in good faith to resolve
any dispute that arises under this Agreement. If the parties fail to resolve the
dispute by negotiation, either party may initiate binding arbitration by written
notice to the other party or parties.
14.6.2 Arbitration. Such arbitration shall be conducted by JAMS/Endispute
before a single arbitrator selected by agreement of Biosource and TDCC in
accordance with the rules of JAMS/ Endispute Comprehensive Rules for Commercial,
Real Estate and Construction Cases (WWW.JAMS-ENDISPUTE.COM). It the parties are
unable to agree to a single arbitrator within sixty (60) days of demand for
arbitration, the office of JAMS/Endispute where the arbitration is to be held
shall appoint the arbitrator. If TDCC or DAS initiates the arbitration with
Biosource, it shall be conducted in San Francisco, California, and if Biosource
initiates the arbitration, it shall be conducted in Indianapolis, Indiana. The
arbitrators shall not be empowered to award damages in excess of compensatory
damages. Judgment upon any decision rendered by the arbitrators may be entered
by any court having jurisdiction.
14.6.3 Procedure for Disputes. The procedures set forth in Sections
14.6.1 and 14.6.2 are the sole and exclusive procedures for the resolution of
disputes among the parties arising out of or related to this Agreement;
provided, however, that any party may seek a preliminary injunction or other
provisional judicial relief if, in its sole
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judgment, such action is necessary to avoid irreparable damage or to preserve
the status quo.
14.6.4 Stay of Court Actions. All pending court action shall be stayed
and all applicable statutes of limitation and defenses based on the passage of
time shall be tolled while alternative dispute resolution efforts are pursued.
The parties shall take such action, in any, necessary to effectuate such stay or
tolling. The parties shall continue to perform their obligations under this
Agreement pending final resolution of a dispute.
14.7 Entire Agreement. This Agreement, together with the exhibits
hereto, contains the entire understanding of the parties with respect to the
subject matter hereof. All express or implied agreements and understandings,
either oral or written, heretofore made are expressly merged in and made a part
of this Agreement. This Agreement may be amended, or any term hereof modified,
only by a written instrument duly executed by both parties hereto.
14.8 Publicity. Biosource, DAS and TDCC each agree not to disclose the
existence of, or any terms or conditions of, this Agreement, or any results
arising from the Research Collaboration, to any Third Party without consulting
the other party prior to such disclosure. Notwithstanding the foregoing,
Biosource and TDCC shall agree upon the substance of information that can be
used as a routine reference in the usual course of business to describe the
terms of this transaction, and Biosource, DAS and TDCC may disclose such
information, as modified by mutual agreement from time to time, without
consulting the other party.
14.9 Headings. The captions to the several Articles and Sections hereof
are not a part of this Agreement, but are merely guides or labels to assist in
locating and reading the several Articles and Sections hereof.
14.10 Independent Contractors. It is expressly agreed that Biosource and
each of TDCC and DAS shall be independent contractors and that the relationship
between Biosource and either TDCC or DAS shall not constitute a partnership,
joint venture or agency. In particular, this Agreement is not intended to create
a partnership for tax purposes. Neither Biosource nor TDCC/DAS shall have the
authority to make any statements, representations or commitments of any kind, or
to take any action, which shall be binding on the other, without the prior
consent of the other party.
14.11 Exports. The parties acknowledge that the export of technical
data, materials or products is subject to the exporting party receiving any
necessary export licenses and that the parties cannot be responsible for any
delays attributable to export controls which are beyond the reasonable control
of either party. Biosource and TDCC agree not to export or re-export, directly
or indirectly, any information, technical data, the direct product of such data,
samples or equipment received or generated under this
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Agreement in violation of any applicable export control laws or governmental
regulations. Biosource and TDCC/DAS agree to obtain similar covenants from their
licensees, sublicensees and contractors with respect to the subject matter of
this Section 14.11. The obligations of set forth in this Section 14.11 shall
survive the expiration or termination of this Agreement.
14.12 Waiver. The waiver by either party hereto of any right hereunder
or the failure to perform or of a breach by the other party shall not be deemed
a waiver of any other right hereunder or of any other breach or failure by said
other party whether of a similar nature or otherwise.
14.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.14 Conditions Precedent to Effectiveness of This Agreement. This
Agreement shall become effective as of the Effective Date upon the satisfaction
of the following conditions precedent:
14.14.1 Hart-Scott-Rodino Act. If required by law, the parties will, at
their own expense, prepare and make appropriate filings under Title II of the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules
and regulations promulgated thereunder (16 C.F.R. 801.1 et. seq.) (the "Act") as
soon as reasonably practicable. The parties shall cooperate in the antitrust
clearance process and agree to furnish promptly to the FTC and the Antitrust
Division of the Department of Justice any additional information reasonably
requested by them in connection with such filings. In the event filing is
required under the Act, but the waiting period has not expired within six (6)
months (such period to be extended for any period of delay by any party in
providing information requested by the FTC or the Department of Justice) either
TDCC or Biosource may terminate this Agreement.
14.14.2 Warrant Agreement. Biosource and TDCC shall have executed a common
stock warrant agreement.
14.15 Addition of Affiliates. Upon notice to Biosource, TDCC shall have
the right to add to the definition of an Affiliate under this Agreement any
entity in which TDCC owns or directly or indirectly controls more than fifty
percent (50%) of the outstanding stock or other ownership interest of the
corporation or entity, or if it possesses, directly or indirectly, the power to
manage, direct or cause the direction of the management and policies of the
corporation or other entity or the power to elect or appoint fifty percent (50%)
or more of the members of the governing body of the corporation or other entity.
If any such Affiliate will be sublicensed to use Discovery Technology or
Production Technology Owned by Biosource, TDCC shall notify Biosource and such
Affiliate will be required to confirm to Biosource in writing that it
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will abide by the obligations under this Agreement (including Section 3.16
hereof).
14.16 Financial Reports. During the duration of the Research
Collaboration, Biosource will provide to TDCC promptly upon request financial
statements for: (i) the quarter just ended; (ii) the period from the beginning
of the fiscal year to the end of the most recent fiscal quarter completed; and
(iii) the most recent fiscal year completed. These financial statements will be
prepared in accordance with generally accepted accounting principles,
consistently applied except to the extent otherwise indicated. Audited
statements shall be provided when these are available. In addition, Biosource
shall promptly furnish to TDCC copies of reports in connection with an audit
which report material inadequacies in accounting controls and notice of any
occurrence which could have a material effect on the ability of Biosource to
fulfill obligations under this Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute and deliver this Agreement as of the date first set
forth above.
BIOSOURCE TECHNOLOGIES, INC.
By:
- ------------------------------------
Print name:
- ------------------------------------
Title:
- ------------------------------------
THE DOW CHEMICAL COMPANY DOW AGROSCIENCES LLC
By: By:
--------------------------------- ----------------------------------
Print name: Print name:
-------------------------- --------------------------
Title: Title:
------------------------------ -------------------------------
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<PAGE> 77
SCHEDULE I
SUMMARY OF OVERALL RESEARCH PLAN AND
ANNUAL RESEARCH PLAN FOR FIRST CONTRACT YEAR
Overall Research Plan
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
1
<PAGE> 78
[*]
Annual Research Plan for First Contract Year
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
2
<PAGE> 79
[*]
Budget
Biosource and TDCC through the Research Committee will develop a research
budget for each Annual Research Plan. Such budget is subject to approval
by the Steering Committee. The budget shall include cost estimates for
each month in various catagories of expenses determined in accordance with
generally accepted accounting principles, including: labor, overhead,
depreciation of capital, etc.
While the parties anticipate research expenditures of approximately twelve
million U.S. dollars ($12,000,000) per Contract Year, a ramp-up during the
first Contract Year is expected. The rate at which ramp-up occurs will
depend upon progress made in hiring personnel and acquiring equipment. A
sample budget for the first Contract Year is presented in Schedule V.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
3
<PAGE> 80
SCHEDULE II
DAS PRODUCTION TECHNOLOGY PROVIDED TO THE RESEARCH COLLABORATION
Proprietary DAS TechnologyPromoters
per5/adh U.S. Serial No. 09/097319 filed 6/12/98
maize metallothionein DAS Disclosure No. 50529
MIP synthase Promoters DAS Disclosure No. 50597
3' Untranslated Sequences
Vp1 DAS Disclosure No. 50527
maizeper 5 U.S. Serial No. 09/097319 filed 6/12/98
maize GF 14 DAS Disclosure No. 50527
Introns
per 5 U.S. Serial No. 09/097319 filed 6/12/98
Transformation Expertise
[*]
Regeneration Expertise
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 81
SCHEDULE III
TDCC TECHNOLOGY PROVIDED TO THE RESEARCH COLLABORATION
TDCC is not providing Technology to the Research Collaboration or Biosource
other than Product Technology and Production Technology discovered or developed
in the course of the Research Collaboration.
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SCHEDULE IV
ILLUSTRATIVE EXAMPLES OF
DISCOVERY TECHNOLOGY, PRODUCTION TECHNOLOGY AND PRODUCT TECHNOLOGY
<TABLE>
<CAPTION>
CATEGORY
- ---------------------------------------------------------------------------------------------------------------------------------
DISCOVERY PRODUCT PRODUCTION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Geneware viral vector suitable for Genes causing plants to modify their DAS maize Per 5 or 3'untranslated
expressing heterolgous gene(s) in oils which were discovered using sequence used as part of a gene
plants Discovery Technology construct from Product Technology
category to express said gene in a plant
- ---------------------------------------------------------------------------------------------------------------------------------
Automated methods for rapidly inserting Genes affecting plant architecture DAS Vp1 used as part of a gene genes
Genes into viral vectors, and for (height, shape, number of branches, construct from Product Technology
infecting plants to identify said genes' etc.) which were discovered using category to express said gene in a plant
functions Discovery Technology
- ---------------------------------------------------------------------------------------------------------------------------------
Improvements to viral vectors to enable Herbicide resistance genes discovered Methods for transforming foreign genes
infection of reproductive tissues using Discovery Technology into corn tissues and regenerating
fertile plants
- ---------------------------------------------------------------------------------------------------------------------------------
Development of software to archive data Genes which pro ect plants against
from high throughput gene insects or disease and which were
testing/sequencing and to analyze said discovered using Discovery Technology
data in order to discover gene functions
- ---------------------------------------------------------------------------------------------------------------------------------
Genes for enzymes which can be used in
fermentation organisms to produce high
value secondary metabolites, such as
novel lubricants or polymers from
microbes, discovered in plants using
Discovery Technology
- ---------------------------------------------------------------------------------------------------------------------------------
A promoter used in a viral vector to Genes which enhance yield of other Same subgenomic promoter used in
express a gene in an infected plant, or growth parameters or which confer Discovery Technology could be used to
to improve the infection process, e.g., resistance to stress express a gene in a transgenic plant,
a promoter used in a viral vector as a e.g., a promoter driving a gene for oil
subgenomic promoter for testing gene modification in corn
functions in plants
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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SCHEDULE V
COSTS WITHIN SCOPE OF SPONSORED RESEARCH
Biosource's actual costs of performing sponsored research will be determined in
accordance with generally accepted accounting principles (GAAP) consistently
applied. Such costs include direct research costs (salaries, wages and related
costs; laboratory operating expenses; general and instrument supply costs;
straight line depreciation expense of equipment over three years; greenhouse
costs); allocation of applicable general and administrative (Allocated G&A)
costs (which excludes Direct G&A costs); and Direct G&A costs. Allocated G&A
costs will be calculated based upon a procedure, which is to be determined by
mutual agreement of Biosource and TDCC reasonably promptly after the Effective
Date, using either: (i) the percentage of direct research costs of the Research
Collaboration relative to total direct research costs of Biosource (including
costs of the Research Collaboration) multiplied by the total G&A costs of
Biosource (excluding direct research costs and direct G&A costs for both the
Research Collaboration and other activities); or (ii) a mutually agreed
percentage multiplied by the direct research costs of the Research
Collaboration. Direct G&A costs for the Research Collaboration include fees for
legal services and fees paid to Technology Directors for management services but
only to the extent such services are specifically directed to the conduct of the
Research Collaboration and not for the benefit of other Biosource activities. In
addition, Biosource and TDCC have agreed that up to three hundred thousand U.S.
dollars ($300,000) in legal costs incurred by Biosource during negotiation of
the Collaboration and License Agreement may be included in Direct G&A costs with
such costs to be amortized over three (3) years. Biosource and TDCC will
determine by mutual agreement the types of costs (legal fees, management service
fees, etc.) which are to be included in Direct G&A costs and a budget for same
as part of each Annual Research Plan. TDCC shall not be responsible for Direct
G&A costs in excess of the budgeted amount without its prior written consent.
The following chart summarizes the estimated cost in thousands of dollars:
<TABLE>
Estimated *
Annual Costs
------------
<S> <C> <C>
Direct Research Costs
Labor $4,000
Laboratory operating costs 2,700
Supplies 1,350
Depreciation - straight line 1,050
Greenhouse costs 300
------
Total Annual Direct Research Costs 9,400
G&A Costs
Allocated G&A costs 1,950
Direct G&A costs1 (including outside
legal fees) 100
Total Annual G&A Costs 2,050
-------
$11,450
=======
</TABLE>
- --------
* Estimated costs based upon the annual research plan as of July 1998. Actual
costs will be determined in accordance with GAAP consistently applied.
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<PAGE> 84
SCHEDULE VI
TECHNOLOGY OWNED BY BIOSOURCE AND EXPERTISE TO BE PROVIDED TO TDCC/DAS
DURING THE RESEARCH COLLABORATION
INTELLECTUAL CAPITAL
Biosource will provide key people to engage in the Research
Collaboration from current staff at Biosource and from targeted and
selected outside hires. Biosource expects to reach 24 people (employees
and/or contract personnel) during the first Contract Year focused on the
Research Collaboration. The final list of the people from Biosource
selected to be focused on or dedicated to this effort will be completed
after the Collaboration and License Agreement is signed. Biosource
personnel focused on the Research Collaboration may need to be changed
from time to time.
Bisource has indicated that the initial key people from Biosource that are
expected to be dedicated full-time to the Research Collaboration are Dr.
Guy della-Cioppa and Dr. Monto Kumugai.
Biosource will maintain a current list of names & responsibilities
that are focused on the Research Collaboration. An updated list will be
provided to TDCC upon request, but not less than once each quarter during
the Research Collaboration or at any time three or more names on the list
change relative to the previous list provided to TDCC.
SOFTWARE/HARDWARE
The computer program used by Biosource to search for the function of
genes is not unique or proprietary and will be made available to TDCC and
for use in the Research Collaboration, as needed. No proprietary software
is Owned by Biosource which will be made available for use or is useful in
the Research Collaboration.
Within sixty (60) days of signing the Collaboration and License
Agreement, Biosource will provide to TDCC a list of equipment currently
owned or operated by Biosource that will be utilized to support the
Research Collaboration. Biosource will also provide a list to TDCC of any
equipment which will have to be purchased by Biosource for the Research
Collaboration.
WORK PROCESS INFORMATION
Library
Biosource is currently planning on hiring a PhD with expertise in
cDNA library formation that will lead the formation of the library for the
Research Collaboration.
Test Process
Results & samples- Clones / control plants will be sent after the
contract is signed and the appropriate permits have been obtained. DAS
will be taught by Biosource as needed on how to apply the Technology
8
<PAGE> 85
Owned or used by Biosource.
9
<PAGE> 86
Database
A database has not been developed and none exists in house at
Biosource for the TDCC Field. Biosource is not responsible for providing
the 3 way (TDCC/ DAS / Biosource) database. Development of the database
will be led by DAS but the database used by Biosource will need to be
compatible. Biosource is responsible for acquiring appropriate tools for
DNA sequence analysis and tools for mining data which are compatible with
those used by TDCC/DAS. Biosource will be responsible for integrating the
database, tools for mining data, software tools for patent drafting, and
paying for all database costs for internal Biosource use.
Genes
Biosource has no data on quality of clones. Biosource will develop
an identification and tracking process and quality control process.
Biosource is responsible for providing any data that was generated at
Biosource necessary for patent applications.
Genes identified by screens will be sequenced by Biosource.
Compatible bioinformatics tools, coupled with screening data, will be used
to predict gene function by Biosource.
Gene purification
Biosource will be using state-of-the-art technologies available in
the industry for gene purification. Biosource will hire qualified people
to do this. Biosource will develop high-throughput capabilities in gene
purification to the extent required for the Research Collaboration.
Infect plants
Technology used by Biosource for infecting plants is straight
forward & versatile. Biosource will train DAS as needed to allow full use
and exploitation of this Technology. Biosource will develop
high-throughput capabilities for infection process to the extent required
for the Research Collaboration.
Purify and characterize homologs
Biosource will obtain and provide for testing homologs to provide
broad patent protection for inventions made in the Research Collaboration
related to Traits.
EFFICACY OF KEY TECHNOLOGIES
Viral Vector Technology Efficacy Assurance
Biosource will bring the results of its unique infectious know how
for viral vectors and make available same to TDCC and DAS for the Research
Collaboration effort. Biosource will create normalized libraries for
specific dicots, monocots, and non-plant genomes
Discovery Technology Efficacy Assurance
Biosource will utilize in the Research Collaboration its expertise
in modifying viral vectors and will disclose to TDCC any vectors developed
to infect other plant species
Production Technology Efficacy
As set forth in Exhibit C, once the Research Collaboration is fully
underway, four hundred clones from normalized libraries will be generated
as viral infectious particles per day by Biosource by the automated
robotic technologies to be developed by Biosource. Genes will be tested in
the sense or anti-sense orientations. Biosource will ramp their
productivity capability per day to achieve this target during the first
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<PAGE> 87
Contract Year.
As set forth in Exhibit C, the library to be created will consist of
a minimum of 20,000 distinct unique normalized sequences optimized to
contain a high proportion of full length clones, and evaluated by
sequencing a subset of on appropriate number of randomly chosen clones to
estimate the degree of normalization and percent of full length clones.
Biosource is responsible for demonstrating the ability to generate
normalized libraries which are equivalent to that described in Soares, et.
al., PNAS 91:9228-9232 (1994).
Product Technology Efficacy
Biosource is responsible for the hits (genes) and some targeted
screening. DAS is responsible for the initial screening and DAS is
responsible for the assay to define that unique genes are identified.
Process Technology Efficacy
DAS automation of infection process will be developed based on
Biosource teaching DAS how Biosource delivers or transfers virus particle
to achieve optimum infection of plants. Basis of success is that the virus
is infective.
Biosource will develop a high-throughput automated technology for
preparing plant tissues for advanced proteomic and metanomic analysis
using mass spectroscopy and other methodolgies.
Biosource will develop methods for identifying and cataloguing
visual phenotypes produced in infected plants, and will develop methods to
digitally capture these phenotypes for database archiving.
Biosource will develop technology for high-throughput
ultra-miniaturization of plant material by growing and transfecting whole
plants, plant tissues, and plant cells in 96-well microtiter dishes
Applications Efficacy
DAS will perform this step.
11
<PAGE> 88
EXHIBIT A
BIOSOURCE PATENT RIGHTS
<TABLE>
<CAPTION>
DUAL SUBGENOMIC PROMOTER VECTORS
"RECOMBINANT PLANT VIRAL NUCLEIC ACIDS" WO 89/08145 (PCT/US89/00693 FILED 2/24/89)
Related foreign applications:
"Synthesis of Stereoselective Enzymes by Nonchromosomal Transformation of a Host"
Canada, Issued, Patent No. 1,488,667
<S> <C>
"Nonnuclear Chromosomal Transformation" Canada, Pending, Serial No. 591,954
"Nonnuclear Chromosomal Transformation" Australia, Issued, Patent No. 648,411
"Nonnuclear Chromosomal Transformation" Japan, Pending, Serial No. 503105/89
"Nonnuclear Chromosomal Transformation" Europe, Pending, Serial No. 89903418.5
"RECOMBINANT PLANT VIRAL NUCLEIC ACIDS" U.S., ISSUED, PATENT NO. 5,316,931
Related foreign applications:
"Recombinant Plant Viral Nucleic Acids" PCT/US92/06359 Filed 7/31/92
"Recombinant Plant Viral Nucleic Acids" Canada, Pending, Serial No. 2,114,636
"Recombinant Plant Viral Nucleic Acids" Australia, Issued, Patent No. 683412
"Recombinant Plant Viral Nucleic Acids" Japan, Pending, Serial No. 4-511611
"Recombinant Plant Viral Nucleic Acids" Korea, Pending, Serial No. 700361/1994
"Recombinant Plant Viral Nucleic Acids" Europe, Pending, Serial No. 92916441.6
"Recombinant Plant Viral Nucleic Acids" U.S., Pending, Serial No. 08/483,502
"Recombinant Plant Viral Nucleic Acids" U.S., Issued, Patent No. 5,589,367
"Recombinant Plant Viral Nucleic Acids" U.S., Pending, Serial No. 08/480,432
"Recombinant Plant Viral Nucleic Acids" U.S., Pending, Serial No. 08/482,920
"Recombinant Plant Viral Nucleic Acids" WO 96/40867 (PCT US96/09299 Filed 6/6/96)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
"THE CYTOPLASMIC INHIBITION OF GENE EXPRESSION" U.S., PENDING, SERIAL NO. 08/260,546
Related foreign applications:
"The Cytoplasmic Inhibition of Gene Expression" WO 95/34668 (PCT/US95/06741 Filed 5/26/95)
"The Cytoplasmic Inhibition of Gene Expression" Canada, Pending, Serial No. 2,193,094
"The Cytoplasmic Inhibition of Gene Expression" Australia, Pending, Serial No. 26534/95
"The Cytoplasmic Inhibition of Gene Expression" Mexico, Pending, Serial No. 9606476
"The Cytoplasmic Inhibition of Gene Expression" Japan, Pending, Serial No. 8-502208
"The Cytoplasmic Inhibition of Gene Expression" S. Africa, Issued, Patent No. 95/4451
"The Cytoplasmic Inhibition of Gene Expression" Israel, Pending, Serial No. 11/3955
"The Cytoplasmic Inhibition of Gene Expression" S. Korea, Pending, Patent No. 707275/96
"The Cytoplasmic Inhibition of Gene Expression" Europe, Pending, Serial No. 95921458.6
</TABLE>
12
<PAGE> 89
HELPER VIRUS VECTORS
"VIRAL AMPLIFICATION OF RECOMBINANT MRNA IN TRANSGENIC PLANTS"
U.S., ALLOWED, SERIAL NO. 08/176,414
<TABLE>
<CAPTION>
Related foreign applications:
<S> <C>
"Viral Amplification of Recombinant mRNA in Transgenic Plants" WO 94/16089 (PCT/US93/12636 Filed 12/29/93)
"Viral Amplification of Recombinant mRNA in Transgenic Plants" Canada, Pending, Serial No. 2,152,934
"Viral Amplification of Recombinant mRNA in Transgenic Plants" Australia, Pending, Serial No. 59871/94
"Viral Amplification of Recombinant mRNA in Transgenic Plants" Japan, Pending, Serial No. 6-516080
"Viral Amplification of Recombinant mRNA in Transgenic Plants" S. Africa, Issued, Patent No. 93/9798
"Viral Amplification of Recombinant mRNA in Transgenic Plants" Israel, Pending, Serial No. 108241
"Viral Amplification of Recombinant mRNA in Transgenic Plants" S. Korea, Pending, Serial No. 702767/95
"Viral Amplification of Recombinant mRNA in Transgenic Plants" Europe, Pending, Serial No. 94905969.5
"Viral Amplification of Recombinant mRNA in Transgenic Plants" U.S., Pending, Serial No. 08/336,724
"Viral Amplification of Recombinant mRNA in Transgenic Plants" U.S., Pending, Serial No. 08/488,422
COAT PROTEIN FUSION VECTORS
"Production of Peptides in Plants as Viral Coat Protein Fusions" U.S., Pending, Serial No. 08/324,003
Related foreign applications:
"Production of Peptides in Plants as Viral Coat Protein Fusions" WO 96/12028 (PCT/US95/12915 Filed 10/6/95)
"Production of Peptides in Plants as Viral Coat Protein Fusions" Canada, Pending, Serial No. 2,202,652
"Production of Peptides in Plants as Viral Coat Protein Fusions" Australia, Pending, Serial No. 37637/95
"Production of Peptides in Plants as Viral Coat Protein Fusions" Mexico, Pending, Serial No. 972714
"Production of Peptides in Plants as Viral Coat Protein Fusions" Japan, Pending, Serial No. 8-513337
"Production of Peptides in Plants as Viral Coat Protein Fusions" S. Africa, Issued, Patent No. 95/8659
"Production of Peptides in Plants as Viral Coat Protein Fusions" Israel, Pending, Serial No. 115578
"Production of Peptides in Plants as Viral Coat Protein Fusions" S. Korea, Pending, Serial No. 702460/1997
"Production of Peptides in Plants as Viral Coat Protein Fusions" Europe, Pending, Serial No. 95935728.6
</TABLE>
POLYVIRUS VECTORS
"EXPRESSION OF FOREIGN GENES USING A REPLICATING POLYPROTEIN PRODUCING VIRUS
VECTOR" U.S., ISSUED, PATENT NO. 5,491,076
"POLYVIRUS VECTORS FOR THE EXPRESSION OF FOREIGN GENES" U.S., ALLOWED, SERIAL
NO. 08/468,067
GENOMICS
13
<PAGE> 90
"METHOD OF DETERMINING THE FUNCTION OF NUCLEOTIDE SEQUENCES AND THE PROTEINS
THEY ENCODE BY TRANSFECTING THE SAME INTO A HOST" U.S., PENDING, SERIAL NO. (TO
BE ENTERED), FILED 1/16/98
14
<PAGE> 91
EXHIBIT B
GUIDELINES FOR THE CALCULATION OF
VALUE-ADDED, CUMULATIVE INVESTMENT AND ROYALTIES
[*]
15
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 92
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
16
<PAGE> 93
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
17
<PAGE> 94
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
18
<PAGE> 95
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
19
<PAGE> 96
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
20
<PAGE> 97
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
21
<PAGE> 98
EXHIBIT C
BIOSOURCE MILESTONES
I. First Contract Year
A. [*]
B. [*]
C. [*]
D. [*]
II. Second and Third Contract Years
Milestones appropriate to the enhancement of the capacities and
capabilities established in the milestones for the first contract year
will be established as drafted by the Research Committee and approved by
the Steering Committee as part of each year's Annual Research Plan. It is
anticipated that milestones for the second contract year will also include
expansion of the capacity listed in Milestone A of I above to over 800
unique genes/day.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
22
<PAGE> 99
EXHIBIT D
FORM OF MATERIAL TRANSFER AGREEMENT
This Agreement is between Outside Party, with offices located at
[_____](hereafter "Outside Party") and Company, with offices located at
[_____](hereafter, collectively, the "Parties").
Outside Party has experience in the research and development of [_____]and
has the facilities and personnel to carry out laboratory testing on certain
Company confidential and proprietary biological materials including, but not
limited to, [_____] (hereafter, collectively, " Company Materials"). The Parties
desire to have Outside Party conduct testing of the Company Materials for the
purpose of [_____](hereinafter "Research").
Accordingly, in consideration for disclosure of Confidential Information,
sampling of proprietary Company Materials and other valuable consideration,
receipt of which is duly acknowledged, each Party agrees as follows:
1. During the term of this Agreement, Company shall provide Outside
Party with samples of Company Materials free of charge in an amount necessary
for Outside Party's performance of the Research.
2. Outside Party will provide whatever is reasonably necessary for
performance of the Research except for Company Materials provided by Company.
3. The Research is under the direction and control of Outside Party as
an independent contractor. Outside Party shall hold Company harmless for all
claims arising out of Outside Party's use of the Company Materials, except where
negligent conduct on the part of Company is the sole cause of the claim.
4. Company Materials provided hereunder are provided in good faith.
Company neither warrants nor guarantees that such Company Materials and
information relating thereto can be used with complete safety and without any
hazard to persons and property, or that such Company Materials and information
are fit for any particular purpose or effective by any performance standard.
5. Outside Party shall not analyze, clone, or sequence Company
Materials nor have Company Materials modified except for purposes herein nor
shall Outside Party do any research on Company Materials other as provided
herein. Outside Party shall use reasonable efforts to protect Company's Company
Materials from access by third parties. Outside Party's sole use of Company
Materials shall be in testing Company Materials in the Research.
6. Outside Party shall promptly return to Company any unused Company
Materials remaining after performance of the Research as soon as reasonably
possible after completion of the Research. Outside Party will comply with all
legal requirements which includes, but not is not limited to, those related to
any Experimental Use Permit, federal, state and local laws, ordinances and
regulations applicable to the shipment, handling, disposal, storage or use of
any Company Materials.
7. Results of the Research shall be kept confidential by Outside Party
according to the terms set forth below, and shall not be used by Outside Party.
8. Subject to limitations set forth below, all information disclosed by
Company to Outside Party shall be deemed to be "Confidential Information." In
particular, Confidential Information includes, but is not limited to, Company
Materials, the Research, [______]and any other business or technical information
or data which has been received or derived by Outside Party from discussions
and/or resulted from the performance hereunder, or observed by Outside Party as
a result of its visit to Company's facilities, whether communicated in oral,
written, graphic, physical or electronic form. Outside Party shall not publish,
disclose or allow any third party access to, nor use for any purpose other than
that authorized herein, any such Confidential Information without the other
Company's prior written consent. These obligations of confidentiality and
limited use shall remain in effect until [appropriate time, but not less than
five (5) years] after the date of expiration or termination of this Agreement
(including any extension hereof), but these obligations shall not apply to:
A. information that Outside Party can show was in its possession
prior to disclosure hereunder and which was not received under obligation of
secrecy; or
B. information that Outside Party can show is in the public
domain, provided it entered the public domain through no fault of Outside Party;
or
C. information that Outside Party can show was received from a
third party which had a right to disclose the information; or
23
<PAGE> 100
D. information required to be disclosed by operation of law,
governmental regulation or court order, provided that Outside Party gives notice
of such required disclosure to Company prior to making the disclosure and that
Outside Party uses all reasonable efforts to secure confidential protection for
the information.
9. Upon request of Company, Outside Party shall promptly return all
tangible forms of Confidential Information including copies thereof, and
permanently delete from any systems containing such Confidential Information all
electronically or otherwise retained Confidential Information, except Outside
Party may retain one copy of Confidential Information as a measure of its
obligations hereunder.
10. Company retains all right, title, and interest in and to (i) any
improvement, invention, copyright, patent, trade secret or other intellectual
property (hereafter "Proprietary Rights") developed by Company independently of
Outside Party, and (ii) any Proprietary Rights developed under this Agreement
regarding Company Materials, uses thereof and related research methods, analyses
or data.
11. If the Parties agree to enter into a subsequent business/technical
relationship, the terms and conditions for such business/technical relationship
will be negotiated in good faith; however, it is understood that neither of the
Parties hereto is under any obligation to enter into any business/technical
arrangement or agreement with the other Party by virtue of this Agreement.
12. Outside Party agrees it shall not knowingly export, directly or
indirectly, any United States source technical data acquired from a United
States based company, or any direct product of that technical data, to any
country for which the United States government or any agency thereof at the time
of export requires an export license or other approval, without first obtaining
such license or approval, when required by applicable United States law.
13. This Agreement shall be governed by the laws of the State of
[Company's domicile], except that its conflict of laws provisions shall not
apply.
14. This Agreement may be amended, superseded or canceled only by a
written instrument which specifically states that it amends, supersedes or
cancels this Agreement, is signed and delivered by both of the Parties intended
to be bound thereby.
15. Either Party may terminate this Agreement upon thirty (30) days
prior written notice to the other Party.
16. This Agreement is effective as of the date of the last signature
hereto ("Effective Date"), and the term of this Agreement is one (1) year from
the Effective Date. Any amendment to this Agreement shall be in writing signed
by an authorized representative of each Party. The individuals signing below on
behalf of Outside Party and Company represent that they are authorized to sign
on behalf of Outside Party and Company, respectively, and indicate the
acceptance of the terms of this Agreement.
AGREED TO AND ACCEPTED BY:
Outside Party Company
------------------------ ------------------------------
By: By:
- ---------------------------------- ----------------------------------
Name: Name:
----------------------------- --------------------------------
Title: Title:
---------------------------- -------------------------------
Date: Date:
----------------------------- --------------------------------
[In Duplicate]
24
<PAGE> 101
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Large Scale Biology
Corporation on Form S-1 of our report dated March 24, 2000, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Sacramento, California
April 3, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Prospectus and Registration Statement
on Form S-1 of our report, dated January 15, 1999, except as to Note 10, as to
which the date is February 5, 1999, relating to the financial statements of
Large Scale Proteomics (formerly Large Scale Biology Corporation), which appear
in such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
McLean, Virginia
April 3, 2000
